Where should you invest in this festive season: Physical gold or Gold ETFs?

The drop in price of yellow metal, has also led to the muted discounts this time.

To keep up the festive and wedding mood, domestic gold prices have dropped significantly. Photo: Reuters

With the start of festive and wedding season in the country, Indians are gearing up to buy physical gold.

Call it as a tradition/auspicious metal or as an investment. But, if it is as an investment, should you be parking money in physical gold when the other options like gold ETFs, Sovereign gold bonds are available?

To keep up the festive and wedding mood, domestic gold prices have dropped significantly. In the last one month, the prices of the metal has declined by 10% and last week touched Rs 29,550 per 10 grams, the lowest level since June 8.

India being the world's second-biggest consumer, saw a drastic change in the sentiments of the people in the last few days with jewellers witnessing a 25-30% rise in sales on the back of sharp decline in gold prices, a Business Standard report said.

The drop in price of yellow metal, has also led to the muted discounts this time.

But, for those who are still yet to buy the gold, can also look at gold exchange traded funds (ETFs) as an option.

Here's why:

Gold ETFs are funds that invest in physical gold of 99.5% purity. A gold ETF invests 90-100% in physical gold sourced from the Reserve Bank of India (RBI) approved banks and 0-10% in debt instruments. It is for this reason that Gold ETF returns are mostly in line with the prices of physical gold, a Value Research report said.

The gold ETFs which are open-ended funds trade on a stock exchange and the functions are similar to that of the shares of the company. So gold ETF lets you own gold in your dmat account. As they are actively traded, the liquidity factor comes in. One can easily liquidate at any point of time.

With this, another point comes in is of safety. Having physical gold, could be a cause of worry, as keeping them is sometimes unsafe. But, at the same time, as gold ETFs are electronically traded, the safety factor is high.

Further, the gold ETFs provides the benefit of marketability too, because, you can trade any amount in it just like a normal stock including short selling and buying on margin.

For the third consecutive quarter, gold ETFs booked MTM gains in the September quarter. Assets increased 1.34%, or by Rs 86 crore, to Rs 6,487 crore, a Money Guru India report said.

But, having said that, ETFs do come at a cost, despite it can be sold at transparent prices. The Financial Express report quoted Naveen Mathur, Associate Director, Commodities & Currencies, Angel Commodities Broking, saying, "A fee is charged by the fund house, so the return is slightly less than the actual increase in gold price. Moreover, there are additional costs involved at the time of buying and selling in the form of brokerage or commission."

So, this festive season, try expanding and exploring your portfolio rather than buying physical gold.

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