Introduction
Given its attributes like intrinsic worth, stability and hedonists, gold has always been the most favored investment tool among the Indian investors. In the modern financial landscape, investors have two popular ways to invest in gold: ETFs that are exchange-traded funds and gold mutual funds. Comparing the two, we aim to show the main distinctions between both versions, as well as their advantages and functionality.
What are Gold ETFs?
Gold ETFs are equity instruments quoted on various stock markets and that contain gold bars as their underlying assets and broadly focus on gold price changes. Like equity shares, they are dealt on stock exchange market. A Gold ETF is structured in such a way that each unit comes with a proportional amount of physical gold so you get the real deal when investing in gold prices.
Key Features of Gold ETFs
- Liquidity: Purchase and sale shares on the stock exchange during trading session.
- Transparency: Pricing is based on the current rates of gold.
- Demat Account Requirement: Writing of Demat account and trading account necessary in order to invest.
- Low Expense Ratio: Less expensive to gold mutual funds.
- Backed by Physical Gold: The goals of financial management include the achievement of quality and security of investment.
What are Gold Mutual Funds?
Gold mutual funds are therefore open-ended funds, which directly invest in gold ETFs or firms that possess gold mining business. These can be bought or redeemed directly from the fund house without opening a Demat account unlike ETFs.
Key Features of Gold Mutual Funds
- Ease of Access: Do not necessarily have to be bought through the Dematerialized trading account.
- SIP Options: There is provision for systematic investment plans (SIPs) for consistent investing in assets.
- Indirect Exposure: Typically buy gold ETFs or funds, gold mining firms, or any other gold products.
- Higher Expense Ratio: Due to the fund management fees Gold ETFs are preferred to it.
- NAV-Based Transactions: Funds are based on the cost value or known as the Net Asset Value (NAV).
Difference between Gold ETFs vs. Gold Mutual Funds
| Aspect | Gold ETFs | Gold Mutual Funds |
| Mode of Investment | Traded on Stock exchange | Invested Through mutual fund companies |
| Demat Account | Mandatory | Not required |
| Liquidity | High (real-time trading) | Moderate (based in NAV) |
| Expense Ratio | Lower | Higher (includes fund management fees) |
| Investment Mode | Lump sum or through trading | Lump sum or SIP |
| Tracking Mechanism | Directly tracks gold prices | Indirectly linked to gold prices |
| Taxation | Taxed as non-equity (capital gains rules) | Taxed similarly (capital gains rules) |
Advantages of Gold ETFs
- Cost Efficiency: Reduced expense ratio contributes to better future performance, all things being equal.
- Transparency: Real time pricing gives you a clearer view of where your money is going.
- Liquidity: It is also easily purchasable, and can be sold on various exchanges without worrying about extra fees.
- No Entry or Exit Loads: There are no extra concealing charges throughout the acquisition and/or redemption of this good.
- Direct Gold Exposure: Supported by gold metals to make sure that the product is pure and that they are all standardized.
Benefits of Gold Funds
- Convenience: You do not need a Demat account for investing; thus, it is suitable for new investors.
- Systematic Investment: Indeed, a payment of SIPs can be small and regular, which makes it easy to set up disciplined savings.
- Professional Management: Portfolio managers oversee your portfolio meaning that there is close to no monitoring required.
- Diversification: May involve investing in stocks of gold firms or any other gold associated products.
Things to note when Selecting
Investment Objective
- If you want unleveraged exposure to gold price, opt for gold ETFs.
- Choose Gold Mutual Funds if you want a convenient way to invest and start a SIP.
Demat Account
- While investing in Gold ETFs one needs both Demat account as well as trading account, this is not the case with Gold Mutual Funds.
Cost Considerations:
- Gold ETFs are cheap than other options of investing in the precious metals for it comes with low expense ratios.
Liquidity Needs:
- That’s why Gold ETFs are more liquid, one can trade it real-time.
- Gold Mutual Funds have restricted public float while the existing fund has limited Secondary Market Exit Option based on NAV.
Time Horizon:
- While both types of investment products are good for medium to long-term investment, Gold ETFs are particularly ideal for active traders.
Tax Implications
Gold ETFs:
- For taxation are considered as non-equity assets.
- Income gained from sales of other securities within less than three years period, that is, sales which earn income taxed in the person’s income tax rate.
- The income from the sale of long-term capital assets, if the holding period is more than 3 years, attracts a tax of 20%, calculated on the cost of acquisition of the asset indexed for inflation.
Gold Mutual Funds:
- Taxation is also like Gold ETFs.
Examples of Gold ETFs are as follows:
- Nippon India Gold ETF
- SBI Gold ETF
- HDFC Gold ETF
- ICICI Prudential Gold ETF
List of Gold Mutual Funds in India
- SBI Gold Fund
- Aditya Birla Sun Life Gold Fund
- Kotak Gold Fund
- HDFC Gold Fund
Gold ETFs vs. Gold Mutual Funds: Which One to Choose?
Choose Gold ETFs If:
- You have a Demat account and want live exposure.
- Let the process be as affordable as possible and as transparent as they come.
Choose Gold Mutual Funds If:
- You do not have a Demat account meaning the process of investment is to be easier.
- I like investing systematically through SIP’s.
Conclusion
Investing in Gold ETFs or Gold Mutual Funds has its special benefits. In this choice, the factors include your investment objectives, convenience of an investment using this asset, the fees that will be required, and your financial plan.
For those who want direct exposure and low costs Gold ETFs can be recommended while Gold Mutual Funds are suitable for beginners and for systematic investment.
As you evaluate your financial requirements and take a look at the details of every avenue, you will have enough material to create the most suitable decision aligned with the portfolio plan.
Frequently Asked Questions
1. Is Gold Funds a Good Investment?
Indeed, Gold Funds may be a good investment choice for those interested in the following aspects:
- Portfolio Diversification: Gold is that asset which has usually thrived during uncertain times and offers stability to the portfolio.
- Inflation Hedge: The value of gold, throughout history, has always stayed intact in inflationary scenarios and hence acts as a haven.
- No Demat Account Needed: Investment is allowed without having to maintain a Demat account and therefore easily accessible for all.
2. Gold Funds or ETFs- Should You Invest?
All depends on your investment needs and preferences:
- Gold ETFs: Suitable for investors having a Demat account who want to trade gold in the stock exchanges. These have lower expense ratios, real-time trading, and direct exposure to physical gold prices.
- Gold Mutual Funds: Ideal for investors who do not have a Demat account or who like to invest through SIPs. These funds are managed by professionals and may also invest in gold-related securities such as mining companies.
3. Does gold mutual fund attract tax?
Ans: Yes, profits through gold mutual funds may incur capital gains tax.