Physical gold or gold ETF? Which is better in terms of return on investments? Before comparing the returns given by both these investment instruments, it’s important to understand their fundamental differences.
Physical gold refers to gold that is purchased in the form of coins, bars or jewelry. Physical gold is owned directly by an individual or organisation. In contrast, gold ETFs (Exchange-Traded Funds) are an investment option that allows investors to buy shares representing a portfolio of gold or gold-related assets, which are traded on the stock market.
Physical gold typically incurs higher initial costs due to manufacturing and storage expenses. On the other hand, the acquisition and owning costs of gold ETFs are less expensive. The one cost associates with gold ETFs is brokerage fee, to be paid on buying and selling.
Liquidity is another distinguishing factor. Physical gold may take longer to sell and convert into cash, gold ETFs can be quickly bought or sold on the stock market.
Also read: How much a Rs 1 lakh investment in gold, real estate and Indian stocks has grown in 20 years
Gold or Gold ETF? Which is better?
“Investors favour investing in gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the US Federal Reserve in the coming months,” Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, says.
Expressing similar views, Ramkumar S, Partner, Grant Thornton Bharat, says, “Gold has become a safe investment option owing to inflationary pressure and increasing geopolitical pressure, however manufacturing, storage, insurance expense results in a higher initial cost and the biggest problem is its less liquid and may not give you the same return as other asset class.”
“Gold ETF nullifies this as its less expensive with some brokerage costs for each transaction. Also its easy to liquidate the same through the exchange and there is quick price discovery unlike physical gold. The value of Gold ETF comes from this,” adds Ramkumar S.
Gold ETF price is determined by supply and demand and the returns will fluctuate basis the forces of demand and supply and the prices will always be lower than physical gold,
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