India's Love Affair with Gold

"Gold in India is not just a commodity, it's a way of life. It's a reflection of our identity, our culture, and our traditions. It's the ultimate expression of our love and reverence for all things pure and precious." - Rupi Kaur

Gold acts as a store of wealth and savings and has traditional and religious significance. At the same time, there is no other asset that matches the universal acceptance of gold has anywhere in the world. It works as a great hedge against inflation and as a currency in times of sovereign risk.

While we are no strangers to the sheen of gold, Indians have not been as forthcoming in adopting technology that makes owning gold a lot easier, safer and cost-effective

Gold ETFs

Gold Exchange-Traded Funds or ETFs allow investors to purchase/ sell and make arbitrage gains on gold through an electronic medium. Gold ETFs have been in India since 2007 and are highly regulated instruments traded on the NSE and BSE.

Gold ETFs can be purchased through various open-ended mutual fund schemes which passively invest in bullion, mining or ancillary businesses that are directly involved in producing gold. Investing in gold through an ETF has many advantages from a pure investment perspective and here are some reasons why it may be a better option than holding on to physical gold

Investment unit

Gold through ETFs is purchased in units, where each unit is equivalent to one gram. This makes purchasing gold extremely efficient and budget-friendly. It is easier to make small purchases or accumulate gold through SIP.

The standard denomination for purchasing physical gold is usually 10 grams, also colloquially known as a 'tola'. Smaller denominations through physical outlets may be possible but depend on the retailer you are purchasing from.

Pricing

Pricing on gold ETFs is completely transparent and uniform following the London Bullion Market Association (LBMA), which is the global authority on precious metals. Pricing of physical gold, however, is not uniform and will vary from one seller to the other based on their own cost of holding, adding administrative cost and mark-ups.

Purity

Purity is a major concern when purchasing gold from a jeweller. Unless the gold is accredited by an authority or has a Hallmark authentication, usually selling physical gold will have some discrepancy in purity.

In a gold ETF, every unit you purchase is guaranteed with a 99.5% purity which is the standard for the highest level of purity. The value of the gold you hold is based on this purity.

Charges

Purchases through a gold, ETF invites a brokerage of 0.5% on lesser for every trade and a management fee/expense ratio of about 1% every year for managing the portfolio. This is negligible compared to 8% - 30% making charges that one would have to pay to jewellers and banks even if the unit is purchased in the form of coins or bars.

Liquidity and Returns

Buying and selling gold through ETF is very easy and swift. Making arbitrage trading a possibility. On both buy and sell trades, a brokerage is the only charge that traders would incur.

Physical gold, on the other hand, attracts the same 'making charges' even on a sale eating heavily into the gains (if any) of the seller. Additionally, physical gold can be only sold to retail jewellers or pawn stores even if it has been brought through a bank.

Holding Costs

Electronic gold is held in the Demat account and incurs no other cost than annual Demat charges that you would be common for all equity and mutual fund holdings. At the same time, the digital format eliminates any risk of loss or theft.

Physical gold, on the other hand, has to be stowed safely. There is risk involved when holding on to tangible gold. This is the reason why many people keep their gold in safety deposit lockers which incur a hefty annual fee.

Conclusion

ETFs are significantly convenient, cheaper and safer as an investment tool. Investors looking to add gold to their portfolio should consider ETFs over physical gold for the host of advantages they provide.