There is a sentimental value and undying love for gold among Indians. Also, this has increased over the past few decades. In fact, many investors know that gold can be a great hedge against inflation and equity investment. Also, investing in gold helps in portfolio diversification. However, the way people invest in gold has changed over time, where people prefer digital gold to physical gold. Digital gold has become popular and has investment options like Sovereign Gold bonds, Gold ETFs and Gold Mutual Funds. This article will discuss the differences between Gold ETFs vs Gold Mutual Funds.
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Difference Between Gold ETF and Gold Mutual Fund
The following are the differences between Gold ETF vs Gold Mutual Fund:
|Parameters||Gold ETF||Gold Mutual Fund|
|Meaning||Gold ETFs invest in physical gold of 99.5% purity which is sourced from banks and approved by RBI.||Gold Mutual Funds are open-ended mutual fund schemes that invest in gold ETFs.|
|Investment Amount||The minimum investment amount equals 1 gram of gold at the prevailing price.||The minimum investment amount is Rs.1000 (as monthly SIP)|
|Mode of Investment||Only Lump Sum. SIP option is not available||Investors can invest via SIP or lumpsum route|
|Demat Account||Investors require a demat account to subscribe to units of Gold ETFs||Demat account is not required to invest in gold mutual funds|
|Liquidity||Being listed on the stock exchange, they are easily traded on the stock market during market hours at any time offering high liquidity to investors.||They are not listed on the stock exchange but can be bought/sold on the NAV for that day.|
|Exit Load||Gold ETFs do not charge exit load||Gold mutual funds have exit load charges if redeemed before one-year|
|Transaction Cost||The management costs of gold ETFs are comparatively lower as they are passively managed funds.||Gold mutual funds invest in gold ETFs, including the ETFs costs.|
|Conversion||Investors have an option to convert the gold ETFs into physical gold.||Gold MF does have such an option. The investment remains as a fund.|
Who Should Invest in a Gold ETF?
Gold ETFs are ideal for investors who wish to diversify their investment portfolio through another asset class. Also, they suit investors who want exposure to gold and want to participate in the market. Since Gold ETFs are backed by the gold of 99.5% purity, they are low-risk investments. Hence, they are suitable for investors with low-risk tolerance levels.
Gold ETFs are in a dematerialised form which reduces the risk and costs of storing gold. Moreover, these funds are more tax-efficient than physical gold. Hence investors who want to invest in gold to earn a return or convert them into physical gold in future can consider investing in Gold ETFs. Furthermore, Gold ETFs track the prices of gold in real-time. Hence investors who want to track their gold investments on a real-time basis can consider investing in Gold ETFs.
Who Should Invest in a Gold Mutual Fund?
Gold mutual funds offer the combined benefits of investing in physical gold and professional fund management. These funds are a more comfortable option to invest in gold than holding a physical asset. Also, gold funds are an excellent alternative for investors looking for diversification through a different asset class. Investing in gold funds is beneficial during uncertainty in equity markets because it acts as a hedge for the investment portfolio.
Gold funds are suitable for investors who aim to protect their capital against inflation or as hedge when investing in equity. Also, investors who cannot invest high value in purchasing physical gold can invest through gold funds. Especially small investors can choose to invest through the SIP route in a disciplined manner and not worry about timing the market. Moreover, holding a demat account is not compulsory while investing in gold mutual funds. However, they are costlier than gold ETFs as the portfolio invests in gold ETFs, including the ETF charges as well.
Gold ETF vs Gold Mutual Fund – Which is Better investment Option?
There are many similarities between gold ETFs and gold mutual funds. Both are safe investment options where investors need not worry about theft or storage in case of physical gold. Investing in these funds helps investors diversify their investment portfolios. Also, trading and withdrawal in both the funds are very easy. However, choosing between the two ultimately depends on the investor’s financial objective and investment amount.
Gold mutual funds do not need a demat account as they invest in gold ETF floated by the AMCs. Also, it allows investors to invest through the SIP route, which is not possible in gold ETF. Furthermore, gold funds are subject to exit load if redeemed before one year, which is not applicable in the case of gold ETFs.
On the other hand, gold ETFs require a demat account to buy and sell units. The fund holds physical gold equivalent to its value as the underlying asset. Also, the units traded on stock exchanges offer high liquidity to investors. Moreover, investors have an option to convert the ETF into physical gold.
After considering the differences between the two funds, a gold fund is suitable if investors are looking for a regular investment rather than a lump sum. At the same time, gold ETF can be a cost-effective option by investing a lump sum amount today. Therefore, it is the decision of convenience which entirely depends on the individual’s investment objective.