Why gold that doesn’t glitter may be the right choice this Dhanteras

Indians’ love of gold is legendary, and deeply ingrained in Hindu mythology. 

As the legend goes, a fortune teller cursed the 16-year-old son of King Hima, saying he would die of a snakebite on the fourth day of his marriage. When the day came, his wife illuminated their house with lamps and placed piles of gold and silver ornaments in front of it. The bright metals ultimately blinded the god of death, who had come in the form of a snake. Indian women have amassed gold and silver jewellery on Dhanteras ever since.

Buying physical gold, however, isn’t the most convenient investment for everyone. If you see gold as purely an investment, consider buying gold exchange traded funds (ETFs) instead. You can buy these at a fraction of the price needed to buy physical gold and don’t have to worry about a host of issues associated with owning the precious metal.

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While India is by far the world’s biggest consumer of physical gold, it’s ranked 8th on gold ETFs, according to the latest data from the World Gold Council. Here are some of the benefits of gold ETFs and reasons why you might choose them over physical gold this Dhanteras.

Limitations of physical gold

Although physical gold has some utility in the form of jewellery, it’s not the most convenient investment out there. For one, when you exchange gold coins or ornaments for cash, the jeweller typically deducts at least 3% as fees. And if you have gold coins or bars and want to convert them into jewellery, you need to shell out an additional 10% or more.

However, there’s an even bigger problem. How do you know the gold you’re buying is even genuine? Measuring its purity isn’t straightforward. While some gold jewellery is hallmarked – certified as genuine – it’s common to find gold that isn’t.

Benefits of gold ETFs

If you’re buying gold purely as an investment, meaning you have no use for the actual metal, ETFs are probably the better choice. The gold is stored on your behalf and you can sell it more easily than physical gold. The value of your investment is linked to gold prices as polled by the London Bullion Market Association (LBMA). These prices are then converted into Indian metrics and currency and shown to investors. Transportation costs and other charges that may be required to transport the gold from London are also added.

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Asset management companies (AMCs) that sell gold ETFs appoint custodians to handle the physical metal, which is stored in vaults. Sebi regulations require AMCs to buy gold that has a purity of at least 99.5% according to LBMA standards. These ETFs charge around 0.50% to 0.80% a year as fees, which include the cost of running the operation and insurance.

While selling physical gold requires you to find a buyer willing to pay a fair price, you can sell gold ETFs with the click of a button. When selling, you’ll have to pay a 12.5% tax on a portion of your gains if you’ve held the ETF for more than 12 months. If you’ve held it for less than 12 months, gains will be taxed at your slab rate. Gold mutual funds that have gold ETFs as the underlying asset are taxed at 12.5% if held for more than 24 months.

“Liquidity of gold ETFs is much better than in the physical market. If you bought physical gold and wanted to sell it, the impact cost of selling it would be huge,” said Vikram Dhawan, head of commodities and fund manager, Nippon India Mutual Fund.

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If you want to convert your gold ETF holdings into physical gold, your best bet is to sell them and buy the metal. While there is an option to convert your gold ETF holdings to physical gold, you need a minimum investment of ₹25 crore to do so under Sebi regulations.

Buying a gold ETF is also a good option if you don’t have the money to buy a gold coin or jewellery as they let you invest as little as ₹100 at a time. So if you can’t afford piles of gold to ward off serpents this Dhanteras, a gold ETF may be just the ticket.