What is the Difference Between Gold ETF vs Gold Mutual Fund?
Gold is a popular investment choice, but many people are unsure of the best way to invest in it. If you’re considering gold as part of your investment strategy, it’s important to understand your options. In this article, we’ll focus on two common methods for investing in gold that don’t involve buying physical gold: Gold ETFs and Gold Mutual Funds. We’ll explain how each works and highlight the differences to help you make an informed decision based on your financial goals.
What are Gold ETFs?
Gold ETFs or Gold Exchange Traded Funds are designed to track the price of gold with 99.5% purity. These Gold ETFs can be an easy way to own gold without the hassle of physically buying and storing the precious metal. Each unit of a Gold ETF represents a portion of the value of gold. Like all ETFs, the worth of a gold ETF varies depending on market dynamics and factors related to supply and demand. ETFs are similar to mutual funds but can be bought and sold on the stock market. However, if you wish to buy Gold ETFs, then you need to open a demat account. You can utilise smallcase to open a demat account.
What are Gold Mutual Funds?
A Gold Mutual Fund, also known as a Gold Fund, is an open-ended mutual fund that allocates its investments to units of Gold ETFs. Similar to Gold ETFs, the primary objective of this fund is to invest in gold of 99.5% purity and generate income.
Here, it is important to remember that gold mutual funds only invest in gold via Gold ETFs. They do not invest directly in stocks of gold mining, refining, processing, and packaging companies.
Mutual funds investing in these companies are categorized as thematic by SEBI. It’s crucial not to conflate them with the gold mutual funds mentioned earlier, a significant factor to weigh when choosing where to invest. Unlike gold mutual funds, the performance of a thematic gold fund hinges on the companies and themes it is associated with, not solely on physical gold price fluctuations.
How Are Gold ETFs And Gold Funds Similar?
Gold ETFs and gold funds share similarities. Both investment instruments may provide exposure to the price movements of gold. They both allow investors to participate in the gold market without the need for physical ownership of the precious metal. Additionally, both Gold ETFs and gold funds are influenced by fluctuations in the market price of gold, making them responsive to changes in the precious metal’s value. Despite these similarities, it’s crucial to note that the structure and underlying mechanisms of gold MF vs gold ETF can vary, impacting factors such as expense ratios, liquidity, and ease of trading.
Difference Between Gold ETF and Gold Mutual Fund
Now that we have understood the similarities between gold ETF vs mutual fund, let’s have a look at the difference between gold fund and gold ETF.
| Feature | Gold ETF | Gold Mutual Fund |
|---|---|---|
| Underlying Asset | Physical gold, gold bullion, futures contracts | Gold and gold-related securities, gold ETFs, mining and refining companies |
| Trading Platform | Stock exchange | Investment platform, like AMC |
| Investment Minimum | Typically 1 gram of gold (varies by ETF) | Lower minimums, often ₹1,000 – ₹5,000 |
| Demat Account | Required | Not required |
| Mode of Investment | While most Gold ETFs focus on lump sum investments, there are some that offer SIP (Systematic Investment Plan) options. | Investors can invest via SIP or lumpsum route |
| Liquidity | High, trades throughout the day | Lower, redeem based on NAV calculated at day’s end |
| Management | Passive, tracks gold price | Active, managed by fund manager |
| Costs | Lower expense ratio (around 1%) | Higher expense ratio (around 1.5% – 2%) |
| Exit Load | None | May have exit load for early redemptions (often before 1 year) |
| SIP Option | While it is true that SIPs are generally available for mutual funds, some Gold ETFs in India do offer SIP options as well. | Available for most gold mutual funds |
| Suitability | Investors seeking direct gold exposure, easy trading, cost-effectiveness | Investors comfortable with active management, lower minimums, SIP convenience |
Features Gold ETF vs Gold Mutual Fund
Let’s have a look at the unique features of Gold MF vs Gold ETF.
Features of Gold Mutual Funds
- Mutual gold funds can be purchased without the need for a Demat account.
- They offer straightforward access to gold, simplifying the process of investing in the precious metal.
- Gold funds serve as an effective hedge against both inflation and political instability, potentially providing stability to your investment portfolio.
- They offer a simple and effective means to diversify your investment portfolio.
Features of Gold ETFs
- Gold ETFs are electronically managed, eliminating the need for investors to arrange physical warehousing.
- Listed on stock exchanges, Gold ETFs provide real-time trading opportunities for investors.
- Gold ETFs ensure high liquidity, facilitating convenient cash access and withdrawals for investors.
- Gold ETF expenses are lower compared to the costs associated with acquiring, storing, selling, and insuring physical gold.
Who Should Invest in Gold ETFs?
Gold ETFs can be useful for diversifying an investor’s portfolio. This can be suitable for investors who desire gold exposure and market participation. These low-risk investments are backed by 99.5% pure gold, making them suitable for cautious investors. Choosing dematerialised gold ETFs reduces storage risks and costs. They also have lower taxes compared to physical gold. Gold ETFs may be suitable for investors seeking returns or the option to convert holdings into physical gold. They provide real-time monitoring of gold prices, allowing investors to track their gold assets effectively. However, while Gold ETFs allow investors to hold gold in paper form and sell it, not all Gold ETFs provide the option to convert holdings into physical gold. This depends on the specific ETF.
Who Should Invest in a Gold Funds?
Gold funds can be suitable for those who are aiming to hedge against inflation or secure their cash. If unable to purchase physical gold, investors may opt for gold funds. Small investors can regularly invest through SIP, avoiding concerns about market timing. Unlike gold ETFs, gold mutual fund investments don’t require a Demat account but are relatively pricier due to additional ETF fees in the portfolio.
Advantages & Disadvantages of Investing in Gold ETFs
Let’s have a look at the advantages and disadvantages of investing in Gold ETFs.
Advantages
- Easy and Convenient: No need to physically store or insure gold, simply buy and sell units like stocks.
- Highly Liquid: Trade gold ETFs on stock exchanges throughout the day for quick buying and selling.
- Transparency: Direct exposure to gold price fluctuations with clear and transparent pricing.
- Diversification: Adds a valuable hedge against market downturns as gold often behaves differently from stocks.
- Low Management Expense Ratio (MER): While many Gold ETFs have low expense ratios, they typically range from 0.5% to 1%. Some ETFs may have an MER as low as 0.25%, but this is rare.
Disadvantages
- No Dividends: Unlike some gold mining companies, ETFs themselves don’t generate any dividends.
- Indirect Ownership: You don’t own the physical gold itself, just units representing its value in the fund.
- High Risk: Buying a gold ETF may require paying a premium, and selling incurs transaction costs. Gold ETFs commonly have higher expense ratios compared to mutual funds. However, while Gold ETFs may trade at a slight premium or discount to the gold price depending on market conditions, they aren’t inherently “high risk.” The risk is primarily tied to gold price fluctuations.
- Limited Management Control: No control over the ETF’s gold holdings or investment strategy.
Advantages & Disadvantages of Investing in Gold Mutual Funds
Let’s have a look at the advantages and disadvantages of investing in Gold Mutual Funds.
Advantages
- Lower Minimum Investment: Compared to Gold ETFs, you can start investing with much smaller amounts, often as low as ₹1,000-₹5,000, making it accessible to a wider range of investors.
- Diversification: Some gold mutual funds may diversify beyond pure gold exposure, investing in gold-related securities, mining companies, or other assets, which can offer additional risk mitigation.
- SIP Option: Many gold mutual funds offer Systematic Investment Plans (SIPs), allowing for convenient and disciplined investing through regular small contributions.
- No Demat Account: Unlike Gold ETFs, you don’t require a Demat account to invest in gold mutual funds, simplifying the process for beginners.
Disadvantages
- Higher Costs: Expense ratios are typically higher compared to Gold ETFs, potentially impacting your long-term returns.
- Lower Transparency: The underlying holdings and investment strategy may be less transparent than with Gold ETFs, which track the gold price directly.
- Potential Underperformance: Active management doesn’t guarantee outperformance, and the fund could potentially underperform the gold price due to management fees and strategy choices.
- Exit Load: Some gold mutual funds may charge exit loads for redeeming your investment before a specific holding period, reducing your flexibility.
Which is Better Gold ETF or Gold Mutual Fund?
There are many similarities between gold ETFs and gold mutual funds. Both offer a secure investment without concerns about theft or storage. Investing in them helps diversify portfolios, and trading and withdrawals are easy. The choice between them depends on the investor’s financial goals.
Gold mutual funds, not requiring a demat account, invest in gold ETFs by AMCs. They allow SIP investments, unlike gold ETFs. Gold funds may have exit loads within a year, unlike gold ETFs.
On the other side, gold ETFs need a demat account and trade on stock exchanges, offering high liquidity. Investors can convert ETFs into physical gold. Choosing between the two depends on whether one prefers regular investments (gold fund) or a lump sum (gold ETF), based on individual investment goals.
After considering the difference between gold ETF and gold mutual fund, a gold fund is suitable if investors are looking for a regular investment rather than a lump sum. On the other hand, if you have a lump sum amount and want a cost-effective option, go for a gold ETF. The decision depends on your investment goals and convenience.
To Wrap It Up…
Gold ETFs and Gold Mutual Funds are two distinct investment options for those looking to gain exposure to gold without buying physical gold. Both options provide exposure to gold but differ in their structures, costs, and management styles. Gold ETFs tend to have lower expense ratios and higher liquidity, while Gold Mutual Funds may offer professional management and the option to invest in gold-related industries. Understanding these differences can help investors choose the option that aligns with their financial goals and investment preferences.
Frequently Asked Questions About Gold ETFs vs Gold Mutual Funds
Gold ETFs can be good investments for: hedging against volatile markets, adding portfolio diversification, and seeking long-term asset stability. However, you can consider your portfolio needs and risk tolerance before making a decision.
Gold ETFs are generally cheaper than Gold Mutual Funds. They typically have lower expense ratios (0.5% to 1%) due to passive management. Gold Mutual Funds, which may include active management and additional costs, tend to have higher expense ratios (1% to 2%) and may charge exit loads.
Gold ETFs and digital gold serve different investment preferences. Gold ETFs provide a cost-effective, liquid way to invest in gold through securities traded on stock exchanges, typically requiring a demat account. They offer direct exposure to gold prices. In contrast, digital gold allows smaller investments, starting from Rs. 1, with the option for physical gold delivery. It doesn’t require a demat account but may involve storage or redemption fees. The choice depends on whether you prefer trading on exchanges or investing in smaller amounts with physical gold options.
Mutual funds and ETFs each have their advantages depending on the investment strategy and market conditions. Mutual funds, particularly actively managed ones, can outperform ETFs if the fund manager selects winning stocks or assets. However, ETFs are generally passively managed and have lower fees. The performance of both investment types varies, with mutual funds offering professional management and ETFs providing cost-effective, broad market exposure. The choice depends on individual investment goals, risk tolerance, and preferences for management style.
