Gold ETFs; What are the advantages and disadvantages?

Investment

oi-Sunil

By Sunil Fernandes

Published: Saturday, February 16, 2013, 10:19 [IST]

Gold ETFs or Gold Exchange Traded Funds have been touted as the best replacement for physical gold. In fact, Gold and ETFs have outperformed benchmark stock indices in the last few years, making them an attractive investment proposition.

Gold ETFs are open ended mutual funds whose units represent physical gold with 99.5 per cent purity. Each unit represents 1 gram of gold. These units are traded on the stock exchanges though the volumes could be low at times.

Here are a few advantages and disadvantages of gold ETFs, though it must be admitted that the advantages far outweigh the disadvantages.

Advantages

Gold ETFs track gold and can be accumulated in small amounts for future needs including retirement, marriage etc.

Gold ETFs also offer fairly good liquidity and can be easily sold. Interestingly, unlike physical gold that do not attract VAT, service tax etc. Also, unlike physical gold where long term capital gains would apply only after three years, in the case of gold ETFs long term capital gains would apply after a period of one year.

Interestingly, it may be noted that physical gold attracts wealth tax, whereas there is no wealth tax payable on gold ETFs.

Also, there is no question of theft in the case of Gold ETFs and one need not purchase an incur storage charges like expenditure for a bank locker

Disadvantages

Gold ETFs may be slightly more expensive than physical gold because of the management fees charged by the respective fund house. Also, one has to incur brokerage which could increase the price of a unit of the ETF.

In any case gold ETFs are gaining popularity as the government plans to discourage the import of physical gold as it continues to put pressure in the current account deficit. Over a period of time Gold ETFs are likely to become extremely popular.

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