What is the Difference Between Gold ETF vs Gold Mutual Fund?
Today we’re going to talk about one of the most preferable investment avenues: GOLD. If you are here, chances are you must be considering investing in gold but struggling to find the right way that is suitable for you. Therefore, today we’re going to talk about two popular options and it’s not investing in physical gold. These are Gold ETFs and Gold Mutual Funds. Let’s explore the differences between the Gold ETF vs Gold Mutual Fund, helping you make an informed decision based on your investment preferences and financial goals.
What are Gold ETFs?
Gold ETFs or Gold Exchange Traded Funds are funds that aim to invest in gold 99.5% purity and generate income. These Gold ETFs can be an easy way to own gold without the hassle of physically buying and storing the precious metal. Imagine tiny gold bars, each represented by a unit of an ETF. 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.
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 | Only Lump Sum. SIP option is not available | 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 | Not available for most ETFs | 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 dematerialized gold ETFs reduces storage risks and costs. They also have lower taxes compared to physical gold. Gold ETFs can be a good option 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.
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): Typically, gold ETFs have an MER of 0.25% or less. While certain mutual funds may impose annual management fees of 1% or more.
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.
- 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…
To conclude, Gold ETF vs Gold Mutual Fund are two different investment avenues. Opt for gold funds if you prefer consistent, long-term investments. On the other hand, choose gold ETFs if you want the convenience of holding gold in a Demat account and potentially converting it into physical gold in the future. The choice is yours!
FAQs
Gold ETFs can be good investments for: hedging against volatile markets, adding portfolio diversification, and seeking long-term asset stability. Consider your portfolio needs and risk tolerance before diving in.
When comparing between Gold SIP vs Gold ETF are generally cheaper than gold mutual funds. They typically have lower expense ratios and transaction costs, making them a cost-effective choice for investors seeking exposure to gold.
You can start investing in digital gold with just Rs. 100. The main distinction is that digital gold offers a physical delivery option, which gold ETFs lack.
While some actively managed funds outperform ETFs over short periods, consistently beating them long-term is challenging. Lower fees and efficient tracking of benchmarks often give ETFs an edge in the end.
