Difference Between Physical Gold vs Gold ETF

difference between physical gold and gold etf

Nowadays, you can invest in gold virtually via Gold Exchange-Traded Funds (ETFs) that are traded on the stock market. While both options let you invest in the same asset, they work differently in many ways. Physical gold is the real metal in the form of coins, bars, or jewellery. Gold ETFs are digital investment options that track gold prices and trade on the stock market.

This article will analyse the fundamental differences between physical gold and Gold ETFs. From cost and safety to convenience and liquidity, you will have a clear idea to decide which suits your investment style best.

Table of Contents

arrow-icon

What is Physical Gold?

Physical gold is a classic type of gold investment. It includes gold jewellery, bars, coins, and bullion with different levels of pure gold. The worth of physical gold is based on its weight and purity. However, it's essential to consider the other costs related to investing in physical gold, such as manufacturing, storage, and insurance costs, which will affect your total investment.

Many investors believe gold is a hedge against inflation and economic uncertainty. Therefore, it is usually held either as a multi-year investment or as a temporary holding that will protect the investor from some risk or market volatility.

How Does Physical Gold Work?

Buying gold in its physical form is easy; you buy it, store it, and then sell it when you want. Let's look into how it works:

  • You own physical gold, which is available in various forms, such as coins, bars, and jewellery, which cater to different investment preferences.
  • Due to extra costs such as taxes and manufacturing fees, physical gold typically retails for 3-8% more than the market price.
  • A 3% GST is applied in addition to the market price of gold. The jewellery you buy also has making charges, which vary considerably depending on the design or artist (they could be 8%- 25%).

What is a Gold ETF?

A Gold ETF is a commodity-based mutual fund that replicates the price of physical gold. Like stocks, gold ETFs are traded on stock exchanges such as the NSE and the BSE. Usually, one unit of ETFs represents one gram of gold. Gold ETFs can be bought and sold from a demat or trading account.

Each Gold ETF unit in India equals 1 gram of pure gold (99.5% purity). Asset Management Companies (AMCs) manage these funds. They create ETF units representing ownership portions of this collective gold holding. Gold ETFs provide Indian investors a convenient, cost-effective way to include gold in their portfolios.

How Does a Gold ETF Work?

Gold ETFs in India run through a straightforward and transparent process. You can trade gold ETFs on the stock exchanges with your demat and trading account. Here is how Gold ETFs work:

  • Authorised participants provide physical gold to the ETF custodian in exchange for ETF units.
  • The units are listed on the NSE and BSE, and the prices move with market demand and gold prices.
  • Investors buy or sell units through their demat/trading account, with one unit usually equaling 1 gram of gold.
  • A fund manager holds the physical gold in insured vaults and charges an annual expense ratio of 0.5% to 1.0%.
  • The sale proceeds are credited to your account after the second business day from the transaction date.

Difference Between Physical Gold and Gold ETF

Understanding the difference between physical gold and Gold ETFs is crucial so you can make the right decision based on your preferences. Let's evaluate the differences between each investment in the table below so you can decide which is better for your objective:

Aspect Physical Gold Gold ETF
Definition It is real, tangible gold you can buy as jewellery, coins, or bars. You store it at home, in lockers, or with banks. It is a digital investment that tracks gold prices and trades on stock exchanges. You buy and sell it through a demat and trading account.
Ownership Direct ownership of physical gold holdings that can be seen and verified. Indirect ownership of gold is obtained with units holding gold in secured safekeeping by funds' custodians.
Wealth Tax If physical gold is held for over 3 years, then a 20% tax applies to capital gains. If held for less than 3 years, it will be added to the individual's income and taxed as per the slab. No wealth tax applies to Gold ETFs. Since they are financial instruments, they are not considered part of physical wealth.
Storage Requires safe personal storage arrangements such as home lockers or bank lockers. No storage requirements for investors as the fund will handle all the storage activity in professional vaults.
Returns The returns on physical gold depend on market fluctuations. However, selling gold in the form of jewellery or ornaments might reduce returns due to the loss of value in making charges. Gold ETFs track the price of gold closely. While they provide near-market returns, the management fees (0.5% - 1% per year) slightly affect the overall returns.
Demat Account A demat account is not required to own physical gold. A demat and trading account are required to buy, hold, and sell Gold ETFs, which are traded on the stock exchange.
Buying/Selling Process Purchase from authorised dealers, banks, or jewellers. Selling may have deductions on pricing or purity verification. Trades immediately during trading hours in any demat account, such as regular stock, with instantaneous price execution.
Counterparty Risk Physical gold has no counterparty risk because you own the asset. Gold ETFs have almost no counterparty risk because they are backed by a custodian and managed by a fund manager.
Price Premium Prices are often higher due to making charges, GST, and dealer premiums. Usually retailed at 3-10% over gold prices because of making charges. GST 3% is applicable. Jewellery-making charges range between 5%-7%. Trades at prices very near the actual value of gold with very low premiums, sometimes even at minor discounts.
Liquidity Less liquid with potential delays in selling at reasonable market prices, especially for jewellery pieces made to specifications. Very liquid with immediate selling ability within market hours at open market prices.
Minimum Investment There is no minimum investment in physical gold. You can purchase small amounts, like a coin or a gram, based on your budget. The minimum investment in a Gold ETF is usually aligned with one ETF unit, typically 1 gram of gold.
Market Risk Physical gold is subject to market risks like price fluctuations, storage issues, and theft. Gold ETFs are also exposed to market risk because their value is linked to the price of gold. However, ETFs are traded on the stock market, so their market pricing can fluctuate according to market supply and demand.
Management Physical gold does not require any management.  Gold ETFs are managed by fund managers who charge a fee for managing the ETF. The fees usually range between 0.5% and 1% annually.
Divisibility You cannot partially sell; you sell coins or jewellery as complete pieces. Extremely divisible with the capability to sell specific units required for definite cash needs.
Taxation
  • For physical gold, short-term gains are taxed at slab rates.
  • Long-term gains (more than 3 years) are taxed at 20% with indexation.
  • Short-term gains from Gold ETFs are taxed as per the investor’s income slab.
  • Long-term gains are taxed at 12.5% without indexation for holdings exceeding 12 months.

Advantages of Investing in Physical Gold and Gold ETF

Each form of gold investment has unique benefits, and appreciating the differences can help investors choose the right one. So let's explore the benefits of both:

Advantages Physical Gold Gold ETF
Ownership Physical gold gives you direct ownership of an actual, visible asset that you can hold on to and store wherever you are. Gold ETFs give you ownership of a digital asset you do not have to store or secure.
Market-Linked Returns The value of physical gold grows with market price appreciation over time. Gold ETF is easily traded in your existing demat and trading accounts and does not involve a middleman.
Liquidity You can sell physical gold at jewellery shops, banks, or dealers, but the process takes time for price negotiation, purity checks, and paperwork.  Gold ETFS are listed on stock markets, providing high liquidity with open pricing during market hours.
Loan Facility Used as collateral for gold loans with banks or NBFCs. Physical gold is readily accepted. Typically, it is not loan collateral. Some lenders might accept securities, but I have never seen them accept ETFs.
Security It requires personal storage, such as a locker or home safe. If not stored correctly, your gold is at risk of theft or loss. It is very secure. Fund houses hold them in digital format in government-approved vaults. It does not require personal storage.
Regulated Investment The physical gold business is regulated by hallmarking and invoicing, which assures authenticity. SEBI regulates the Gold ETF, bringing transparency and accountability with investor protection.
Tax Benefits Physical gold held for over 3 years qualifies for long-term capital gains tax benefits. Gold ETF is held for more than 3 years and also gets long-term capital gains tax benefits with indexation.

Disadvantages of Investing in Physical Gold and Gold ETF

Although gold is a reliable investment, both have specific drawbacks and limitations. Below is a detailed overview of the disadvantages of both:

Disadvantages Physical Gold Gold ETF
Storage You will need secure lockers, whether at home or banks, to store physical gold. Gold ETFs are held in your demat account, but you completely depend on digital and the stock exchange to access these assets.
High Transaction Cost Making charges (8–25%) and a 3% GST increase the purchase cost. When selling, dealers often deduct 5–10% from the market value. You pay annual expense ratios and brokerage fees (0.5–1%), which marginally lower your long-run returns.
Tax Reporting The physical gold investments above ₹2 lakhs require PAN details, and any capital gain needs to be inserted into the individual income tax filings. One must report any capital gains from Gold ETFs, and brokers report all transactions to the income tax authorities.
Risk of Purity Issues Physical gold carries the risk of purity discrepancies. The gold you purchase might not be as pure as claimed. Gold ETFs keep certified gold of 99.5% purity with no quality issues.
Limited Trading Hours Physical gold is tradable on business days in jewellers or dealers alone, limiting liquidity flexibility. You can sell Gold ETF only when exchanges are open on weekdays, weekends, and public holidays.
Price-Performance Gap Prices of physical gold reselling tend to depreciate 5–10% from market levels due to the making charges and dealer margins. The expense ratios and brokerage charges of the Gold ETF create negligible underperformance for direct gold prices.

Which is Better Between Physical Gold and a Gold ETF?

When deciding between physical gold and a Gold ETF, your investment goal, risk tolerance, and convenience preference will determine your choice.

Physical Gold is Better For:

  • Traditional family investors, especially during weddings and festivals.
  • Emergency fund planners offer fast processing with minimal documentation at interest rates lower than personal loans.
  • Non-digital investors who are not comfortable using digital instruments or demat accounts.

Gold ETF is Better For:

  • Cost-conscious investors, as it provides cheaper exposure by removing charges, GST, storage, and insurance charges.
  • Systematic investors, who can steadily accumulate positions through monthly fixed investments, encourage systematic wealth accumulation.
  • Portfolio diversifiers looking for equities and debt to be pooled into one demat account.
  • Active traders allow for instant buying or selling during trading hours, unlike physical gold's long transaction procedures.

 

Gold holds a steady place in India's investment market. Its value moves with global prices, currency rates, and demand. It serves as a financial cushion when markets become volatile. Whether for tradition, security, or savvy investment, gold is a dependable choice for all types of investors. Its place in India's market remains steadfast. Gold will remain an integral part of investment strategies for the years to come.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Physical Gold vs Gold ETF

What is Physical Gold?

up-arrow
Physical gold is tangible gold you can touch and store at home or in a bank locker. It consists of gold jewellery, coins, bars, and biscuits. It is purchased for use during weddings, festivals, or for investment.

What is a Gold ETF?

up-arrow
A Gold ETF is an online means of investing in gold. It operates similarly to a mutual fund but can be traded on the stock exchange. You never receive physical gold; instead, you possess units that equal a specified amount of gold. You need a demat and trading account to purchase or sell it.

Which is better: gold ETF or physical gold?

up-arrow
Both are used for different purposes. Gold ETFs are suitable for individuals who desire to invest without touching gold. They are cheap, easy to sell or purchase, and do not require storage. Physical gold is for those who like to own something tangible for domestic use or special occasions in the family.

What is the difference between physical gold and gold ETFs?

up-arrow
Physical gold is an actual asset that you can keep and store. You are required to pay making charges, GST, and storage charges. Gold ETFs are paper investments. They are traded on stock exchanges, there is less expenditure, and there is no physical handling. Gold ETFs need a demat account, while physical gold does not.

What are the disadvantages of a gold ETF over physical gold?

up-arrow
You cannot use ETFs like physical gold as direct collateral for a loan. Gold ETFs also have fund management fees and time availability based on the stock market's opening and closing times, which does not give you instant or 24-hour access to your investment.

Can I convert a gold ETF to physical gold?

up-arrow
Yes, you can redeem physical gold from a Gold ETF. This process is called redemption. However, a fund house will only allow redemption if it has stipulated in the prospectus, and a minimum quantity is usually needed, such as a gram or more. It may also include fees and other paperwork.

Can we sell gold ETFs anytime during trading hours?

up-arrow
Yes, you can sell Gold ETF at any time during trading hours. The funds will be credited to your trading account within 2 working days from the sale date.

Do gold ETFs pay dividends?

up-arrow
No, Gold ETFs do not provide dividends. They are only valued based on the market price of gold. You will earn a profit when you sell it for a price higher than you paid.

What are the advantages of physical gold over a gold ETF?

up-arrow
With physical gold, you have complete ownership and control. You can touch it and hold it yourself, and not rely on a third party. Physical gold is not subject to the stock market or investment fluctuations, which makes it a safer option. Lastly, physical gold incurs no ongoing management fees as gold ETFs do.

Which is safer: physical gold or gold ETF?

up-arrow
Gold ETFs are safer because they do not need to be stored or secured. Physical gold can be misplaced or stolen if not stored properly. Plus, Gold ETFs fall under market rules and SEBI regulations.

Which is more liquid: physical gold or gold ETF?

up-arrow
Gold ETFs are more liquid. You can sell or purchase them immediately during trading hours. Physical gold is slow to sell, and you might not receive the entire market price because of making charges and other deductions.

What are the tax implications of selling gold ETFs compared to physical gold?

up-arrow
Gold ETFs are taxed as capital gains. They are taxed at 20% with indexation benefits if held for over three years. Physical gold follows the same tax rules based on the holding period.

What is the annual fee for the gold ETF?

up-arrow
The annual fee for Gold ETFs ranges from 0.5% to 1%, covering fund management, storage, and insurance costs.

Is physical gold taxable?

up-arrow
Yes, physical gold is taxable. When sold, it is subject to capital gains tax. The tax rate depends on the holding period: short-term (less than 3 years) or long-term (more than 3 years).

Latest News

Currently there are no news to show.

Read More

Renew & Download Policy Document, Check Challan, Credit Score, PUC & more

Anytime, Anywhere. Only on Digit App!

google-play-icon

Rated App

app-store-icon

Rated App

Download the App