Gold ETFs vs. Gold Mutual Funds- Which One Is Better?

In India, gold plays an important role in people’s lives. No auspicious occasion like marriage, birth, or festival is complete without this precious metal. This drives the value of gold and as a result, many investors prefer gold during times of high inflation.

These days, investing in gold has become easier than ever before. Previously, people used to invest in gold by purchasing ornaments, coins, and bars. But, now there are options like gold mutual funds and gold ETFs (Exchange Traded Funds). 

What Are Gold ETFs?

Gold Exchange Traded Funds (ETFs) are passively managed investment schemes that track the domestic price of the physical commodity and invest in gold of 99.5% purity. One unit of gold ETF is equal to 1 gram of gold.

These investment options offer people the perfect combination of stock investment’s flexibility and simplicity of gold investments. In other words, while gold ETFs are managed like mutual funds, investors can trade them on the NSE (National Stock Exchange of India) and BSE (Bombay Stock Exchange) like stocks.

Features of Gold ETFs

Provided below are the important features of gold ETFs:

  • The trading of gold ETFs takes place in the cash segment of NSE and BSE just like stocks. Traders can instantly purchase and sell these ETFs at their current market prices. Trade of gold ETFs takes place through a Demat account and a broker and as a result, the process is extremely convenient.
  • When you purchase gold ETFs, you purchase gold in electronic form. So, when you redeem your investments, you will receive the cash equivalent instead of physical gold.
  • Everyone can view the prices of gold ETFs as it is displayed on stock exchanges. This leads to prices being the same throughout India which makes these ETFs a very transparent investment.
  • A crucial feature that is also a major benefit is that gold ETFs do not involve any hidden charges which reduce the overall earnings of the investor. 
  • Gold ETFs are a cost-effective investment because it does not involve storage costs and making charges like physical gold. The expense ratio involved with these ETFs is quite low as well. Plus, these investment options do not have exit loads, unlike mutual funds. 
  • Long-term capital gains (LTCGs) earned from gold ETFs will be taxed at 20% and indexation will be applicable. On the other hand, short-term capital gains (STCGs) are considered income and taxed as per the investor’s income tax slab rate. 

What Are Gold Mutual Funds? 

Gold mutual funds are open-ended schemes that track the value of gold ETF units, which in turn track the value of physical gold. These mutual funds can also invest in other forms of gold such as physical gold and stocks of gold mining companies. Gold funds offer people the option to start investing in the commodity gold at low prices.

Examples of gold funds include gold mining funds and gold Fund of Fund (FoF). The latter invests in gold ETF units but does not require a Demat account to start investing. Gold mining funds invest in gold mining companies as mentioned above and their returns depend on the performance of these companies.

Features of Gold Mutual Funds 

Listed below are the features of gold mutual funds:

  • Gold mutual funds usually do not generate returns that are as high as equities, but these schemes can outperform stocks during economic recessions. So, the returns from gold funds can help you beat inflation. 
  • If you don’t have the funds to purchase physical gold or don’t wish to spend a huge amount, you can invest in a gold mutual fund. You can use SIPs (Systematic Investment Plans) to ensure small but regular investments in these funds. As a result, people who don’t have a high income fund these mutual funds to be more convenient.
  • Gold mutual funds can be used as collateral for loans. This means that investors can use their investment in a gold mutual fund as security to obtain a loan from a bank or financial institution.
  • Gold mutual funds are well-regulated by the Securities and Exchange Board of India (SEBI). This means that they are subject to strict rules and regulations, which can help protect investors from fraud or price manipulation.
  • Investment in these mutual funds helps to increase your portfolio diversification and introduces a hedge against the effects of inflation and recession.
  • The taxation of gold mutual funds is similar to debt funds. If you redeem your investment before 3 years, the capital gains will be considered short-term capital gains (STCGs) and taxed according to your income tax slab. Long-term capital gains (LTCGs) are taxed at 20% and attract indexation benefits.

Differences between Gold ETFs and Gold Mutual Funds 

The following table presents the main differences between gold ETFs and gold funds:

Parameters Gold ETFs Gold Mutual Funds 
Minimum investment You have to invest at least a sum equivalent to 1 gm of pure gold.The minimum investment amount is ₹100 through a monthly SIP (Systematic Investment Plan).
Investment mode You can invest in gold ETFs only through lump-sum investments.You can invest in gold mutual funds both via SIPs and lump sums.
LiquidityGold ETFs come with high liquidity as they are listed on stock exchanges and people can trade them easily during market hours.People can buy and sell shares based on the Net Asset Value (NAV) of the day. Redemption takes more time compared to gold ETFs.
Demat account A Demat account is a necessary prerequisite for trading gold ETFs.A Demat account is not necessary if you wish to invest in gold funds.
Management cost Gold ETFs are associated with low management costs.Gold mutual funds are associated with higher management costs. This is because these schemes invest in gold ETFs so management cost covers both expenses. 
Exit load Gold ETFs do not charge exit load.If investors may have to pay an exit load.
Conversion Gold ETFs allow investors to convert their investments into physical gold in certain situations. The investor must have ETF units worth 1 kg of gold to get physical delivery.Gold mutual funds offer no such option to convert investments into physical gold.

Final Word

Gold ETFs let you directly invest in gold without having to pay additional costs like expense ratios and exit loads. In contrast, gold funds offer the benefit of SIPs that let you invest an amount as small as ₹100 per month. However, the choice between gold ETFs and gold mutual funds ultimately depends on your personal preference.

Frequently Asked Questions

Do gold ETFs require fund managers? 

Yes, fund managers present in AMCs manage gold ETFs on your behalf. When someone wishes to invest in gold ETFs, they have to approach an Asset Management Company (AMC) and purchase their investment units. In addition, they also have to open a Demat account for trading these ETFs.

Is trading in gold ETFs similar to trading in equities? 

Gold ETFs are similar to equities as investors can trade them on stock exchanges. Moreover, these ETFs can be evaluated against international shares and stocks. Just like stocks and shares, the prices of gold ETFs are subject to market conditions. 

What factors to consider before investing in gold mutual funds? 

Before investing in gold ETFs, people should take into consideration if it has the following features:
Low tracking error
Low expense ratio
Hugh liquidity 

What are the different options to invest in gold other than ETFs and mutual funds?

Other than ETFs and mutual funds, you can invest in physical gold in the form of coins, bullion, jewellery. Alternatively, you can invest in digital gold and sovereign gold bonds (SGB). SGBs are the best investment option to invest in gold if you can hold till maturity as in secondary markets it trades at discount.

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