Physical Gold Or Gold ETF – Which is Right for You?

In the closing lines of my article about Best Gold ETF in India I told why Gold Investment is what I personally prefer and so here I tell why?

I purchased my first Gold bar on 20th January 2007 from my HDFC Bank for a price of 10700 per 10gm. My investment was mainly for long term and it is just today I realized that I am 3 year into the investment and so If I sale I make double the amount and all will be tax free for me. 😀

Now coming back to the topic of Gold ETF Vs Gold Bar let me share positives and negatives of investing in gold bars over gold ETFs but before that let me tell you why you should be investing in gold.

Why Gold Investment?

  • Excellent way to diversifying portfolio.
  • Requires no ongoing maintenance.
  • Gold does not rely on growth prospect of any country.
  • Used in times of high inflation to protect wealth.

Benefits of investing in Gold ETF over Gold Bars

Low cost

No matter which bank you buy the Gold from you have to pay a bit higher than the pure gold price. When I purchased from HDFC bank I purchased at the price of 10,700 Rs per 10 gm but market rate was below 10k and if I remember it correctly was 9800.

Tax benefit

ETF is like a stock where if you remain invested for 1 year+ time you don’t pay any tax on the gains but for Gold it is 3 years.

Gold Bars selling issue

Banks don’t buy back gold bars and so you can have issues selling the bars. You have to sell them to your local goldsmith and so you may not get the right price for selling it.

Benefits of Investing in Gold bars over Gold ETF

Changing NAV without Net Asset

I don’t understand the concept of trading ETF. This may be because of my non-finance background but I still cannot understand the concept of an ETF.

Let me give you an example of what I don’t understand.

Let’s say you have a Gold ETF with Net Asset Value calculated as value of total gold + cash. For the sake of argument let us make the NAV for ETF as 2000. Now as per my understanding your asset pricing can go higher or lower depending on the how your asset value unfolds. Isn’t it?

ETFs are actually traded in the market like stocks and what if no one is willing to sell the ETF at the NAV value of 2000. For argument’s sake, say people are ready to sell at 2010. If you are willing to buy the same ETF you have to be buying it at a price of 2010 which is not the real NAV of the ETF but higher than the net asset of the fund. It is better to be paying the bank the fees than paying higher or lower than NAV for the ETF.

You may argue that stock pricing is not equal to the actual Net Asset of the company but for stock at times you purchase on how things will perform in the future giving them premium but don’t understand why ETFs should be trading at a premium.

So instead of investing in ETF I prefer Gold Mutual funds even.

Not All Your Investment is in Pure Gold

ETF needs to remain liquid and so they cannot invest everything into GOLD and so you are actually not investing in 100% gold.

Final Thoughts

If you are looking to opt for short term trade based on Gold pricing you should opt for ETF or else go with physical gold. Keep in mind that when trading in ETFs, you are trading against the underlying basket of gold as an asset and not in gold.

  • http://nil kusum jain

    sir I am regularly investing 3000 p.m. for one year in Reliance mygold plan they will delever physical gold after one year of my accumulation how it will be kindly reply me thanks

    • Shabbir Bhimani

      The only one question I have is at what price will they deliver your gold? At the price one year back or at todays market price?

  • radhe

    Kindly clear this line more lucidly…with an example
    “”Keep in mind that when trading in ETFs, you are trading against the underlying basket of gold as an asset and not in gold.””

    • Shabbir Bhimani

      ETF is equivalent to gold but not Gold Radhe.

      Example could be An Engineering degree and an degree equivalent to engineering.

  • Banyan Financial Advisors

    Hi Shabbir,

    Went through your nicely written article. It makes sense to think what options an investor has to invest into Gold and the pros & Cons. Traditional investors still would love to buy physical Gold while the new generation investors may consider newer options. I just added an article exploring all options to invest into Gold


    • Shabbir Bhimani

      Yes really very detailed article.

  • nrks

    I have invested in Reliance Gold ETF around 15k I want invest more.
    Can you please help me on this MF. or should go for Kodak gold ETF.
    Please help.
    Consider my investment would be of long term about 1yr.
    Thanks in advance

  • shweta

    Great info Shabbir.

    I am having 1 lakh rs. for a month’s time. I will have to give away that amount for my house in one or two months.

    Please advise,
    1. if I should buy real god and sell it later (local goldsmith may not charge VAT)
    2. or I should invest in ETF and sell
    3. or any other option

    • Shabbir Bhimani

      For a month, it does not make sense to be investing in Gold and if you are not a trader I don’t recommend you trading in ETF.

      So my suggestion would be either don’t do anything or keep in some FD for short period of time.


    i just opened a demat a/c and planned to invest in gold etf only but after reading all posts here about tax(short and long term) and benefits of physical gold,what i have to do with my a/c and other better way for investment

    • Shabbir Bhimani

      Not sure I understand your question.

      • PRAVEEN

        i m a salaried person and looking for best investment option as i m a beginner in trading also.

        • Shabbir Bhimani

          I will suggest you learn before jumping into the market because if you don’t know how to make money from market, you can loose lot of them with a blink of an eye.

          • PRAVEEN


          • Shabbir Bhimani

            The pleasure is all mine PRAVEEN


    I want to allocate monthly 1000 rupees for gold. I am a long term investor..
    if i get this thru etf every time will i be deducted any charges?
    I have a trading account.I need the charging details.

    if i buy this in sip( gold mutual fund) will that be a cost efficient way?
    I ll stick to buying for the next 7 yr to 10 yrs.
    so sugggest me a better method to buy….

    • Shabbir Bhimani

      Yes ETF will have the same charges as any other shares you purchase in your trading account. The best method according to me is always the pure gold and as you have small amount of investment real Gold for such long tenure is preferable.

      • VIGNESH

        Actually if i buy gold using mutual fund route then will there be long term capital gain similar to my etf route?

        generally pls explain me the taxation in both the ways.


        • Shabbir Bhimani

          As you have plans to remain invested for few years there is no worry about capital gain as far as I know.

  • Subal

    Gold prices were high in June but even higher now in August. Would you suggest buying it now for a year’s time frame.

    • Shabbir Bhimani

      I don’t trade in Gold and so I would not be the right person to recommend anything into it but yes I personally buy them but for very long time frames

  • dorge

    I was just advised by my friends to invest in gold. I have never tried this before and I don’t know anything about it at all. So, is it wise to just start off by buying physical gold, or should I visit a bank/professional group and inquire about it?
    If I buy physical gold, should I start small (more like an experiment) or is it safe to start in big amount. As you can see, I am quite apprehensive, this being the first time this thought has crossed my mind.
    Please help!

    • Shabbir Bhimani

      Investing in Gold depends on lot of factors especially time horizon. As a general rule I use for myself is, If I want to be investing for more than a year time I prefer Physical gold and you can create your own such rule that suits your own investment needs. Now about the lumpsum or small amount, then I would suggest accumulate small amounts because Gold is pretty high as of now.

  • swapnil

    hi i want to make investment ( 1 lac) in gold for 5-6 months or lesss than 1 year ,, which is better option for profit booking ?gold or gold etf, ? i neeed max return

    • Shabbir Bhimani

      For such small time frame it is ETF which should be better option for you.

  • Silver Updates

    Thanks for sharing such a great info –



  • Gopi

    I did not understand why the gain from selling physical gold will be tax free. Do you mean that there is no capital gain tax? Or we need not declare it.. :)

    • Shabbir Bhimani

      It will be tax free because I am holding it for more than 3 years now.

      • Naresh Malepaty

        Capital gains need to be paid if one buys and sells physical gold.
        (a.) It would be short term capital gains if one sells the physical gold within 3 years — The tax one pays depends on the slab he / she is in that financial year
        (b.) It would be long term capital gains if one sells the physical gold after 3 years —
        The tax one pays depends on one of the following –
        (i.) (Sale price – cost price) * 10%
        (ii.) Apply indexation and pay 20% tax

        Hope this clarifies!

  • Manshu

    ETFs are not sold directly to the retail investors by their sponsors. There is a layer in between called Authorized Participants (APs)who are usually institutional investors that buy the ETF units called creation units from the sponsor first.

    The ETF sponsor decides a creation unit which could be say 1 kilo of gold or a 1000 units of Nifty, and the APs can create or redeem units by using cash or the underlying.

    So, whenever an ETF is trading at a discount or premium it is in the interest of APs to step in and make money using arbitrage.

    This is the reason you don’t see the ETF prices move far beyond what their NAV is, as there are active and competing players monitoring this closely.

    That doesn’t mean there will never be a case when ETF trades at a significant premium or discount, but those moments will be rare. At least till a few days ago PSLV (Silver ETF in US)was trading at a significant premium, and then the sponsor themselves took out a secondary offering. That’s probably an example of ineffecient pricing, but it’s rare.

    • Shabbir Bhimani

      Manshu but this does not mean the Price becomes at par of Net Asset. Example can be Nifty where Nifty itself is traded but it is weighted sum total of 50 stocks as well and so you can expect divergence of Nifty from the actual value and when those things happen it becomes an arbitrage opportunity. Now should you invest in Nifty. Actually not but trading in Nifty is what you can do but for ETF it is not the same case. You can remain invested in ETF and many investors when they watch ads they thing it is as good as Gold.

      • Manshu

        That will ensure the prices don’t run away too far from the NAV but yeah I doubt if anyone has ever bought any ETF at the price of the exact NAV :)

        Also, when you buy a gold MF it will then go and buy the ETF from its sponsor company, so in effect you end up owning ETFs itself :) Unless you were planning to buy MFs that invest in global gold mining companies.

  • Raju A

    Hi Shabbir,

    “ETF is like a stock where if you remain invested for 1 year+ time you don’t pay any tax”

    I read somewhere that we have to pay long term capital gain tax [not sure 10% or 20%] if we keep Gold ETF 1+ Year. Please correct me if I am wrong.

    Raju A.

    • Shabbir Bhimani

      Any equity investment for a period of 1 year+ is tax free returns. Not sure where you read that but if you can refer it to me I will be more than happy to have a look.