The Pros and Cons of Investing in Gold ETFs vs Physical Gold

Investment today is no longer a form of luxury but has become a necessity to keep you safe on rainy days. It has become essential in any form. Whether you invest in mutual funds, stocks, gold jewellery, or even your bank account, extra money has become necessary money in today’s era. There are multiple investment options available in the market, but choosing the wise one will help you double up your hard-earned money in the long run. 

Gold ETF- A Limelight over the Term 

Gold ETF is an exchange-traded fund that works at the price of physical gold in the market. Buying gold ETFS is similar to buying gold bullion without physically purchasing the asset. The prices of these ETFs depend on the cost of physical gold in the market, and they keep shifting per the current price of the gold. 

These are traded in the form of stocks and can be easily bought and sold. The calculation says, ‘One gram of gold is equivalent to one unit of gold ETF.’ They are also termed as ‘Commodity-based Mutual Funds’. In the case of trading with gold ETF, the commodity’s paper value is traded instead of the actual metal, and the investor receives the equivalent cash instead of gold. 

Why do people invest in Gold ETFs?

Investing in gold ETFs is not just a smart investment option; it is also helpful for investors to diversify their portfolios. It can be equivalently traded as an industry-exchange fund as well. The investors are able to broaden their exposure to different sectors, such as gold mining, manufacturing, and the transport industry. It is similar to the scenario where people today prefer online transactions rather than carrying physical money, which makes them feel like they are spending a huge amount, even for small transactions. 

Many investors prefer to invest in such funds due to their stable market performance compared to currencies. When the value of strong currencies like the dollar dips in the market, the prices of this bullion rise significantly; in such instances, people who have invested in such funds walk with head-highs and a sigh of relief. 

Investment in Physical Gold 

It is an ancient practice to invest in physical gold as a form of secure investment. Our mothers and grandmothers find it one of the best and most secure forms of investment. Hence, buying gold jewelry is always a huge yes for our moms as it serves as a piece of essential beauty along with the purpose of investment as well. It is like hitting two goals with one arrow. 

Physical gold can be purchased in the form of jewelry or bullion. The quality and purity of the expensive metal are measured in the form of carats. One of the biggest concerns after buying physical gold is its safety, and keeping it secure is essential to avoid theft. 

Noticeable Differences between: Gold ETFs vs Physical Gold

CRITERIA	PHYSICAL GOLD	GOLD ETF
Buy and Sell	From jewelers, government and private mints, expensive metal dealers	Stock Exchange
Maintenance	Requires a safe to be stored safely and also needs to be covered under insurance. The process can also be expensive in case of huge quantities.	The fund keeps track of everything along with safety. You need to pay an annual fee for the same.
Liquidity	It is easy to sell physical gold due to the high number of buyers available in the market.	ETFs are traded like stocks, where investors can bid and sell them during the trading houses.
Returns	The amount received depends on the current value of gold in the market.	The value received depends on the price of the ETF. However price is also calculated based on current price of gold, but due to low liquidity there might be see difference between the prices.

Advantages of Owning Gold ETFs

• Easy Trading- Trading of gold ETFs is easier than selling physical gold. The funds can be traded online without the worry of handling gold physically and keeping it secure, unlike metal in its physical form. 
• No Storage Worries- Today, may it be buying vegetables or groceries, meeting friends, or catching up for ice cream, we immediately run with just our phones in our hands with the ease of online payments available, rather than searching for our wallets along with checking the amount to be carried. Similarly, online funds need no physical security, such as a safe or a cupboard, to keep the bullion secure. It makes the process easier and safer for the investor, allowing hassle-free trading. 
• Economical– Expense ratio fees for managing gold funds are comparatively less than the amount incurred to buy physical gold and store and secure it aptly. Hence, people prefer to buy gold ETFs over physical gold. 
• Tax Benefits-Gold ETFs only involve capital gains tax, leaving behind VAT, security transaction tax, and various other types of taxes, allowing an individual to waive off paying any additional amount. 
• Acts as Collateral– Gold ETFs can also be used as a form of repayment for a loan borrowed from any financial institution. Hence, the whole procedure can be carried out online without the hassle of carrying assets physically and without the worry of keeping them secure. Therefore, people who do not wish to worry about managing precious metals physically can opt for GOLD ETFs for secure and hassle-free trading. 

Disadvantages of investing in gold ETFs

Although Gold ETFs provide several benefits, investors should be aware of the following dangers before investing in them:

• Market Risk: Since the value of ETFs is closely correlated with the price of gold, changes in the metal’s price may have an impact on the funds’ returns.
• Tracking Error: Deviations from the underlying gold prices in the performance of exchange-traded funds (ETFs) can affect investor returns.
• Regulatory Risk: Investors should be mindful that modifications to tax laws and regulations may have a big influence on how appealing exchange-traded funds (ETFs) are as a prospective investment vehicle. Remain educated and watchful to protect your investing capital.

Advantages of investing in physical gold

Protect yourself from inflation: Historically, gold has been seen as a safe-haven investment that can stave against inflation. The price of gold often increases when fiat currencies lose value.

• Diversification: Including gold in a portfolio of varied investments can help lower overall risk. Gold’s performance can act as a buffer during market downturns since it is not always associated with that of equities and bonds.
  • Physical gold is a physical good that is able to be kept and handled. For some investors, this might afford them a sense of control and security.
• Value store: For thousands of years, people have used gold as a store of value, and it has mostly maintained its worth throughout time.
• Limited availability: Gold has a limited supply, which may help sustain its  its price over the long term.

Disadvantages of investing in physical gold

• Income: In contrast to stocks and bonds, gold does not yield dividends or interest. Only price appreciation will provide profits for investors.
• Costs associated with storage: Safekeeping charges and insurance premiums are two expenses associated with storing actual gold.
• Hazards related to liquidity: It might be difficult to sell significant amounts of gold, particularly during uncertain economic times.
  • Gold prices are subject to severe fluctuations, which means that investors may suffer substantial short-term losses.
• Opportunity cost: Purchasing gold may require forgoing the possible gains from holdings in other asset types, including bonds or equities.

Conclusion 

Investing in gold is a wise option, and investing in GOLD ETFs is wiser. The option allows you to carry your transaction of buying and selling the equivalent amount online without the hassle of carrying it physically and keeping it secure. Hence, it is a perfect option for youngsters in search of investment options and who do not need physical gold in the form of bullion or jewelry. Investing in gold ETFs allows you to easily buy and sell stocks based on the gold’s current market value, unlike the selling procedure of physical gold, which requires keeping the precious metal safe until its final trade. 

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.