Since years people have been buying gold the traditional way in the form of jewellery or gold biscuits and coins. Then the natural question that will come to ones mind will be why should I buy gold through gold ETF units in demat (electronic) format. Taking the delivery of gold ETF units in demat format over physical gold comes with its own advantages like:
1. In case of gold ETF’s the person need not worry about the purity and quality of the gold. This aspect is taken care of by the stock exchange and the other regulators. There is no impurity risk of any sort in buying gold ETF’s. The gold ETF mutual fund invests in standard gold bullion (99.5% purity).
2. Since the investor is not taking physical delivery he need not worry about storing physical gold at a safe place. Imagine that if you go on accumulating one gram of physical gold every month; after 16 years you will have almost 200 grams of physical gold to take care of. If you keep this gold at home, it’s bound to give you sleepless nights. But since in gold ETF’s the physical delivery aspect is taken care of; you can enjoy sound sleep at night and leave the worry of guarding your gold to the mutual fund AMC.
3. Also you need not spend money on gold insurance and bank locker rent as there is no physical delivery of gold involved.
4. You can buy gold ETF units at the market price. Normally if you buy gold coins or biscuits from banks or jewellers; their prices are different from each other. Also some banks normally charge a premium of 3-5% over the market price of gold. So the gold ETF pricing is very transparent.
5. Similarly when you sell gold ETF units you can sell them at the current market price. There are no cutting charges or making charges or there is no discount to market price at the time of selling the gold ETF units. This ensures that you get a fair price for your gold at the time of selling. Also there are ready buyers available through the exchange for your gold at any given point of time. So this ensures adequate liquidity and you can sell your gold ETF units at any point of time without any loss of value or very little loss of value. Banks normally don’t buy back gold sold by them. Jewellers do buy back gold but at a discount to the market price.
6. With gold ETF’s at a time you can buy as low as 1 gram of gold or half a gram of gold at a time. If you buy gold in the form of coins or biscuits you may have to buy a minimum of 5 grams of gold at a time. Buying half a gram of gold through gold ETF every month is within the reach of common man; but buying 5 grams of physical gold every month may not be within the reach of everyone. So the low entry point offered by gold ETF’s is definitely an advantage as compared to physical gold.
7. If the value of your physical gold goes above a certain level (presently Rs 15 lakhs) then you are liable to pay wealth tax. But investing in gold through gold ETF’s does not attract any wealth tax.
8. If you buy physical gold and hold it for less than 36 months and sell it; you are liable to pay short term capital gains tax. But in case of gold ETF’s if the person holds the gold ETF units for more than 12 months then he has to pay long term capital gains tax. So from tax point of view also gold ETF’s have an edge over physical gold.
So you see buying gold through gold ETF’s rather than traditional ways (jewellery or gold coins and biscuits) has lot of advantages.
The ETF holder (investor) just has to pay an annual expense of the scheme which is also known as fund management charges. This charge is in the range of 0.5% to 1.5% per annum.
