Gold may be better than Gold ETF: Think wisely!

There has always been huge talk going on about investment in metals and the current trend in gold and silver has attracted a lot of investors to participate in this rally. We are over here focusing mainly on investing in gold. Traditionally gold has been purchased in physical form mainly bars and jewellery. Jewellery is not exactly the investment asset class cause it is mainly used for consumptions and has lots of emotional attachment. I have seen no one who has sold jewellery for making money though capital gains. So lets discuss on investment in gold in physical form or ETF. ETF has been the recent concept lets understand how it works.

Gold ETFs are a special type of ETF which invests in Gold and Gold related securities. This product gives the investor an option to diversify his investments into a different asset class, other than equity and debt. Holding physical Gold can have its’ disadvantages:

1. Fear of theft
2. Payment Wealth Tax
3. No surety of quality
4. Changes in fashion and trends
5. Locker costs
6. Lesser realisation on remoulding of ornaments

Gold ETFs overcomes all these disadvantages, while at the same time retaining the inherent advantages of Gold investing. In case of Gold ETFs, investors buy Units, which are backed by Gold. Thus, every time an investor buys 1 unit of Gold ETFs, it is similar to an equivalent quantity of Gold being earmarked for him somewhere. Thus his units are ‘as good as gold’. There have been ETFs which are equal to 1 gram of gold and ½ gram of gold.

Investors can buy/ sell units any time at then prevailing market price. In normal mutual funds buying and selling price is same for all the investors while same is not applicable for ETF buyer as they can by the units during the day based on real time prices.

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Taxation:

	Holding period	Short term tax	Long term tax
Physical Gold	Up to 36 months = short term More than 36 months = long term	Marginal tax rate	20% with indexation benefit
Gold ETF	Up to 12 months = short term More than 12 months = long term	Marginal tax rate	10% or 20%(with indexation) whichever is lower

 

By looking at the table you can clearly understand that gold ETF is better for taxation purpose as well. They are traded on exchange but not covered under STT. Looking at this you will always be convinced to invest in ETF rather than in physical gold but please hold, here comes some of the important things to be considered. See all those as follows:

1. If you don’t have a trading account, you need a demat account. What about the charges of that demat account?
2. You are required to pay brokerage to buy the ETFs, which may change depending on the trading done by you and these are negotiable.
3. Now taxation is the biggest trick on ETF. Let say I am investing in 2 units of ETFs every month for accumulating gold for the purpose of my daughter’s marriage and she is 2 years old now. Assuming marriage age of 25, I will be selling all the units acquired after 23 years hence, my transaction will be ‘long term’ from taxation angle and I will have to pay at least 10% tax on the appreciated value. I want to use the money for buying jewellery then also I will have to pay the taxes while physical gold when converted in to jewellery is not considered as transfer and no tax at all. See how ridiculous it is. So if your investment purpose is same as mine, don’t invest in gold ETF.
4. You can buy gold with cash and same happens when you sell it. Normally all the transactions of the purchase and sale are in cash. How many of us buy gold with cheque or debit/credit card? Answer is almost no one. So gold purchase is not recorded in the books and when you sale the gold cash is received and hence everything is in cash. How many of us actually pay tax on it? Answer is a few. I know tax evasion is crime but that’s what done by almost every Indian. And gold is not reflected in the wealth of an individual.

So what I believe as a planner is, if you want to buy ornaments in future never buy gold ETF but yes if it is for speculating and for long term investment purpose go ahead with ETFs.

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