Advantages and disadvantages of investing in gold ETFs
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Advantages and disadvantages of investing in gold ETFs

The robustness of an investment portfolio plays a significant role in the achievement of goals. Among asset classes, gold is considered the most robust as it counters the effects of inflation and exchange rate fluctuations.

If one considers gold's performance vis-a-vis equity in the past five years, the latter, as measured by the BSE Sensex, has delivered an annualised return of just 2.67%.

Compare this with gold, which has delivered 27.19% annualised return over the same period.

There's no doubt that equity has the ability to outperform any asset class in the long run, but the stock market is prone to high volatility in the short to medium term. With inflation averaging around 7% in the past five years, equity has actually delivered negative real returns.
Studies have proved that gold has a weak correlation with equity, which makes it an ideal asset for diversification. Therefore, the presence of gold in a portfolio makes it more stable and resilient to volatility or market fluctuation.

How can one invest in gold?
Traditionally, investment in physical gold was favoured by the masses. However, after the introduction of ETFs, the gold ETF has emerged as a better medium of investing. It is an open-ended mutual fund whose units represent physical gold that is 99.5% pure, with each unit representing 1 gram of gold. These units are traded on the stock exchanges like a single stock of a company. Let us consider the benefits and drawbacks of gold ETFs.

Gold ETFs provide an opportunity to investors to accumulate gold over a given period of time. Since it can be purchased in small quantities, one can plan the procurement as per future requirements, say, for the marriage of children, etc.

Moreover, there is no risk of theft and one need not worry about the storage cost (as in case of physical gold) because such units are held in demat or paper form. In the case of physical gold, one ends up paying extra for making charges as well, but there is no extra charge applicable in gold ETFs. When needed, one can exchange them in multiples of 1 kg units of 0.995 purity.

Besides, unlike gold coins and bars, for which most jewellers offer only an exchange and not a buyback, gold ETFs can be sold at transparent prices across India. Even in terms of taxation benefits, gold ETFs are way ahead of the physical gold. No sales tax, VAT or securities transaction tax is applicable on gold ETFs.

As units of such funds are traded like stocks on the exchange, it is eligible for the long-term capital gains after one year, unlike physical gold, which is eligible for long-term capital gains after three years. Besides, unlike physical gold, investors don't have to pay wealth tax on gold ETFs.

Most of the above-mentioned advantages come at a cost in the case of gold ETFs. A small asset management fee is charged by the fund house, so the return is slightly less than the actual increase in the gold price. Moreover, there are additional costs involved at the time of buying and selling in the form of brokerage or commission. Another drawback with gold ETFs is liquidity; some ETFs are illiquid, which impacts their buying and selling flexibility. Hence, investors should consider this as a factor while investing in gold ETFs and should stick to funds that are liquid.