Gold ETFs vs Gold Mutual Funds: Gold – The most adored metal in India. Before our growing awareness of stocks, bonds, and fixed deposits, our parents and grandparents made it a point to invest in tangible, real assets like real estate and gold jewelry.
Gold doesn’t pay interest, dividends, or “extra gold” unlike stocks and bonds. But that hasn’t changed the tradition of accumulating gold over time and letting it sit inside a safety deposit box at the bank or buying jewelry and keeping it in a locker at home.
One good reason to hold gold over time is that it acts as a hedge against inflation. We already know how the value of fiat currencies has fallen over the decades. Now what if you want to invest in gold, but don’t feel safe having it with you?
Some might suggest getting a locker but that itself is another expense. But what about the bank’s locker services? While they do provide the service of holding your gold, it doesn’t insure the full value of your assets. How about investing in gold, without the risk of holding any of it?
We’re talking about Gold mutual funds and Gold ETFs. In this article, we’ll cover the two alternative gold investments, explain their features and also compare them by giving their meaning and features – Gold ETFs vs Gold Mutual Funds.
Gold ETFs vs Gold Mutual Funds
Gold ETFs (Exchange-Traded Funds) and Gold Mutual Funds are two different investment vehicles that provide exposure to the price movements of gold.
What Are Gold ETFs?
An ETF stands for Exchange Traded Fund. It is an investment security similar to mutual funds. ETFs track a particular sector, index, and/or asset. So how does that make them any different from index funds?
The answer is in the term – ETF. Unlike mutual funds, ETFs can be bought and sold on stock exchanges just like stocks. As ETFs are traded like stocks on a daily basis, they too undergo price fluctuations as people buy and sell them regularly.
Gold ETFs are a type of exchange-traded fund. Here, the underlying security is the domestic physical gold price. The ETF units themselves represent physical gold, either on paper or in a dematerialized form.
According to AMFII, One Gold ETF unit equals one gram of gold. You can find Gold ETFs on the NSE and BSE, similar to a listed stock of any company on either exchange.
Features Of Gold ETFs
- Buying/investing in gold ETFs is equal to buying gold in an electronic format. Your investment in gold ETFs can be bought and sold just like stocks.
- Redemption of gold ETFs is paid out in cash equivalents, not in gold. Since ETFs are in Demat format, you can trade gold on exchanges using a stockbroker.
- Gold ETFs have a lower expense than buying physical gold, and also a very low minimum investment value. Buying physical gold, either jewelry or bars, and biscuits would require a minimum weightage purchase of one gram (In the case of gold coins).
- When selling gold, jewelers tend to add extra expenses such as making charges & wastage which is non-existent in the case of gold ETFs, allowing investors to buy and sell the ETFs at the same price. You also get to sell your ETF at the real-time price of gold.
- Tax Benefits – Buying gold ETFs comes with multiple tax benefits, such as the exclusion of sales tax, wealth tax, and VAT. Income earned from gold ETFs is treated as LTCG, which attracts a lower tax rate.
Gold Mutual Funds: What Are They?
Gold funds, or gold mutual funds, are funds that invest in gold, directly or indirectly. Investors can buy gold mutual funds instead of investing in physical gold, gold-producing companies, and mining stocks.
Investing in gold mutual funds is one of the alternatives to buying and investing in physical gold. Since gold mutual funds are dependent on the movement of the gold price, their value is completely dependent on gold.
Features Of Gold Mutual Funds
- Gold mutual funds give the opportunity to l gold without having to buy the physical metal. The funds invest in gold and gold-related stocks.
- Investing in gold mutual funds acts as a hedge against inflation and economic downturns, as gold sizeably reduces the impact of a market fall.
- The taxes on gold mutual funds are similar to gold jewelry taxes. It also depends on the duration of the investment. If the gold fund is held for less than three years, it comes under short-term capital gains tax.
If it is held for more than three years, it is considered a long-term investment and is taxed at a 20 percent rate, with indexation.
- Gold mutual funds are ideal for investors who are looking to diversify their investments into other assets such as gold.
Gold ETFs vs Gold Mutual Funds – Table
| S. No. | Factor | Gold Mutual Fund | Gold ETF |
| 1 | Meaning & Definition | Gold Mutual Funds are funds that Invest In Gold ETFs, gold, and gold-related stocks | Gold ETFs invest in 99.5% pure gold and are certified by the Reserve Bank Of India |
| 2 | Minimum Investment Amount | Minimum SIP amount, which starts from Rs.1000. Investors can buy lump sum or through SIP. | One gram of gold is the minimum investment, based on the current gold price. There isn’t a SIP option when investing in gold ETFs. |
| 3 | Demat Account | Gold mutual funds don’t require a Demat account. | A Demat account is necessary for buying gold ETFs. |
| 4 | Exit Load | Applicable if the gold fund is sold before one year of holding. | No Exit Load |
| 5 | Liquidity | Can be bought and sold based on that day’s Net Asset Value of the gold fund. | Higher liquidity as ETFs is listed on the stock exchanges. |
| 6 | Conversion To Gold | Gold funds cannot be converted to physical gold. | Gold ETF investors have the option of redeeming their holding through physical gold bullion. |
Other Gold Investment Options
Here are some other gold investment options, other than physical gold, ETFs, and gold mutual funds:
- Digital Gold
Certain Jewellers such as Tanishq offer digital gold options, where you can invest in gold with minimum amounts and withdraw the investment either as cash or even buy physical jewelry. There are multiple vendors who offer such services.
- Sovereign Gold Bonds
Apart from the private players in the gold industry, the government also has its own government scheme – Sovereign Gold Bonds. These bonds are issued by RBI, and the bonds represent physical grams of gold. They can be bought from banks, brokerages, post offices, and the Stock Holding Corporation Of India.
SGBs have a minimum investment quantity of 1 gram and a maximum investment of 4 kg per individual. SGBs have an assured return on interest, along with the price appreciation of gold.
What Are Gold BeES?
The term BeES stands for – Benchmark Exchange Traded Schemes. These schemes mirror the stocks present in indices and mimic the movement of such indices in the market.
For example – Nifty BeES. It is a collection of the 50 stocks present in the Nifty 50 Index. This sort of scheme will mimic the movement of the index and therefore try to give you the same returns as its benchmark, which in this case, is Nifty 50.
BeES are a type of derivate as their value is derived from the underlying asset, which is usually an index or physical asset like gold. Nifty BeES is one such example, as its value and movement are dependent on the movement of Nifty 50.
Gold BeES is an open-ended investment scheme for gold. The fund mirrors the real price movement of gold. Here, the underlying asset is the physical gold bullion.
Also Read: 10 Best YouTube Channels To Learn Share Market in India 2023!
In Closing
Gold has always been one of the most trusted forms of investment. Indians have relied on accumulating gold for centuries. Now with technology and smart investing options, people can start investing in gold with bare minimum amounts.
We hope you got a clear understanding of Gold ETFs vs Gold Mutual Funds in this article. Besides ETFs and mutual funds, you also have other gold investment options available to you. They offer numerous benefits including tax-saving benefits. Remember to do your own research before investing in any scheme or asset. Happy Investing!
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