Gold has been a favored investment across the world for centuries now. It is an inherent part of a lot of investment portfolios. It is not only considered a safer investment in comparison to equities but is also used as a hedging asset.
Gold investments are available in many forms. It can be bought physically, but that adds to the risk of theft or can be bought digitally. Gold ETFs and Gold mutual funds are becoming increasingly popular ways of investing in gold.
Let's understand these two better
What is a Gold ETF?
Gold ETFs (exchange-traded funds) are passively managed funds and a way more convenient form of investment as compared to physical gold. 1 unit of gold ETF equals 1 gram of gold and the gold prices are reflected without any additional fees. These are traded on exchanges in real-time and unlike physical gold, prices of gold ETFs do not vary statewise.
In ETFs, the fund manager buys gold and deposits it with the scheme’s custodian. The price of gold in an ETF is the same as that of physical gold and so is the return. Also, the expenses of buying a gold ETF are much lower than that of buying physical gold.
It is ideal for investors who are buying gold solely from an investment point of view and not for personal use.
What is a Gold Mutual Fund?
Gold mutual funds are open-ended mutual funds that invest in gold ETFs. The mutual fund returns depend on the performance of the ETF, which in turn depends on the performance of gold. The NAV of a gold fund depends on that.
Like ETFs, one unit here does not denote one gram of gold. Gold funds can also be invested in more than one ETF or other securities depending on its portfolio.
Let's now look at the differences between the two
Demat Account: You do not need a Demat account to invest in gold mutual funds, however, a Demat account is mandatory to invest in a gold ETF.
Minimum investment: Since 1 unit of gold ETF equals one gram of gold, the minimum investment in a gold ETF is the price of 1 gram of gold at any given time. Meanwhile, the minimum investment in a gold mutual fund is ₹1000.
Pricing: Prices of gold fund units are determined by Net Asset Value (NAV) while gold ETFs are listed on the stock exchange and one can get their real-time price
Investment: Gold ETF invest in 99.5 percent pure gold while Gold mutual funds invest in gold ETFs.
Mode of investment: You can buy gold funds using a lump sum or SIP while gold ETFs can be only bought through a lump sum. They do not have a SIP option.
Exit load: Gold ETFs have no exit load which is not the case with gold mutual funds.
Liquidity: Gold ETFs offer better liquidity than gold funds. Investors can buy or sell ETF units at any time during the market hours while you can redeem units of gold funds only after closing.
Taxation
Both gold mutual funds, as well as gold ETFs, are taxed on the basis of the time period. If held for over 3 years, long-term capital gains tax rate would be applicable which is 20 percent plus a 4 percent cess. If units are led for less than 3 years, the gains will be added to the total taxable income and taxes will be levied as per the relevant slabs.
Gold ETFs and Gold mutual funds, both provide a good opportunity to investors to invest in gold without the hassle of buying physically. However, before choosing either option, you must look at their past performance and compare rates to get the best possible deal.