Gold ETF vs Gold Mutual Fund: Which is a Better Investment Option?
Gold holds a lot of value in India. It is a go-to investment option for Indians and also holds enormous sentimental value. However, with developments in technology and the world of finance, investing in gold has changed, too. Gold mutual funds vs gold ETFs have been a point of interest for many investors. Read on to find out the better way to invest in gold.
What are Gold Mutual Funds?
Gold mutual funds invest money in 99.5% pure gold or gold-related assets to generate income. It is important to note that gold mutual funds invest in gold through gold ETFs. However, there are thematic gold funds that invest in gold-related securities, such as gold mining and refining companies.
A gold mutual fund is a helpful way for investors to invest in gold and diversify their portfolios. A gold mutual fund allows investors to reduce their risk and may also result in higher returns than investing in the base commodity.
Benefits of Gold Mutual Funds
To further understand gold funds vs gold ETFs, one should look at the benefits of investing in the two instruments. Here are the benefits of investing in gold mutual funds.
- Lower Capital: Gold mutual funds are a flexible investment option, as investors can invest in the instrument with as little as Rs 500. Meanwhile, buying physical gold requires higher capital.
- Liquidity: Gold mutual funds are highly liquid and can be sold at any time during market hours. Investors can liquidate their investments and get the money with ease.
- Lowers Risk: Investors can lower their risk by investing in gold mutual funds, as these funds are regulated by the Securities and Exchange Board of India (SEBI).
What is a Gold ETF?
To better understand gold mutual funds vs gold ETFs, we must first understand what an ETF is. An exchange-traded fund (ETF) is a financial instrument that tracks the performance of the underlying asset. Hence, a gold ETF is an instrument that tracks the performance of gold.
These ETFs are traded on the stock exchanges and they invest in gold directly by purchasing bullion or futures contracts. Gold ETFs track the performance of gold, and as a result, the performance of the ETF is identical to that of the yellow metal. For example, a fall in the price of gold will result in a fall in the price of the gold ETF.
Benefits of Gold ETF
- Ease of Investing: Since an ETF is traded on the stock exchange, it is easy for an investor to purchase and sell the investment. Consequently, an investor enjoys the benefits of liquidity and is also able to conduct transactions with ease.
- Lower Costs: Gold ETFs offer lower costs to investors due to no entry or exit loads or other associated costs.
- Tax Benefits: Although gold ETFs are subject to long-term capital gains tax, they are exempt from other taxes such as value-added tax (VAT) or Securities Transaction Tax (STT). By investing in a gold ETF, an investor can benefit from a lower tax burden.
Gold Funds vs. Gold ETFs: Key Differences
The table highlights some of the significant differences between gold funds and gold ETFs:
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Gold Funds vs. Gold ETFs |
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Point |
Gold Mutual Funds |
Gold ETFs |
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Meaning |
Gold mutual funds invest in gold or gold-related assets, such as gold ETFs, gold producers, and mining companies. |
Gold ETFs are instruments that track the performance of gold. These ETFs invest in gold by purchasing bullion or futures contracts. |
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Demat Account |
Gold mutual funds do not require a demat account. |
To invest in Gold ETFs, an investor requires a demat account. |
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SIP |
An investor can invest in gold mutual funds through a systematic investment plan (SIP). |
It is not possible to invest in Gold ETFs through SIP. ETF units need to be bought with a lump sum payment. |
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Costs |
Gold mutual funds have higher costs, such as entry and exit loads. |
Gold ETFs have no entry and exit loads. However, demat and brokerage charges are applicable. |
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Taxability |
Long-term capital gains, along with taxes applicable to jewellery, are levied on gold mutual funds. |
Although gold ETFs are subject to long-term capital gains tax, they are exempt from VAT and Securities Transaction Tax. |
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Conclusion
Investment in gold is a good way for investors to diversify their portfolios. Gold investments act as a hedge against inflation and can be a great asset to rely on during unforeseen circumstances. When it comes to gold funds vs. gold ETFs, both instruments offer various benefits and features to investors.
Gold mutual funds and Gold ETFs allow investors to easily invest in gold without needing to purchase physical gold. Both instruments are a great way to invest in an alternative asset in a hassle-free and safe manner. Investors should consider their investment goals and risk appetite before making an investment decision.