Gold ETF vs Gold Mutual Fund

Gold has long been a trusted and traditional investment avenue, valued for its stability and ability to hedge against inflation. It has been a go-to option for generations of investors seeking a safe and tangible asset. In modern times, however, the way people invest in gold has evolved. Instead of buying physical gold, many investors now turn to financial instruments like gold exchange-traded funds (ETFs) and gold mutual funds. These options offer convenience, liquidity, and the potential for better returns compared to holding physical gold.

Key Highlights

• Gold ETFs invest in gold bullion or futures. They track the physical gold prices. Gold mutual funds are open-ended funds that invest directly or indirectly in gold assets.
  

• Gold mutual funds allow SIPs for as low as Rs. 500, while ETFs require a minimum investment of one unit, equivalent to one gram of gold.
  

• ETFs have annual charges of 0.5–1%. This includes brokerage, expense ratio, etc. Conversely, charges for gold funds range between 0.6–1.2%. It includes ETF fees and exit loads for redemptions within a year.
  

• Gold ETFs are less liquid due to a smaller market size. However, gold mutual funds are relatively more liquidity. So they can be easily purchased and sold.
  

What is a Gold ETF?

Gold ETF is an exchange-traded fund (ETF) that tracks the price of physical gold. They are passively managed funds that usually invest in gold bullion or futures. They are exchanged in real-time on exchanges. Gold ETFs purchase 99.5% pure gold from banks approved by the Reserve Bank of India (RBI). A single unit of gold ETF is equivalent to one gram of gold. There are no extra costs associated with the gold pricing.

The manager purchases gold and deposits it with the custodian of the mutual fund. Both the price and return of gold ETFs are identical to physical gold. Additionally, purchasing a gold ETF has lower costs. Moreover, it is easier to invest in gold ETFs physical gold. It may be a good option for individuals purchasing gold as an investment instead of personal use.

Read More: Gold Exchange Traded Funds (ETF) Complete Guide

What is a Gold Mutual Fund?

Gold mutual funds are open-ended mutual funds that directly or indirectly invest in gold assets. The performance of the physical gold determines a gold fund's returns and net asset value (NAV). One unit does not equal one gram of gold here. Gold funds may also invest in gold ETFs or other securities.

Gold mining and gold funds of funds (FoF) are two examples of gold mutual funds. Gold FoFs invest in gold ETF units. So, you don’t need a Demat account to invest in them. The success of gold mining firms determines the returns on gold mining funds investments.

Read More: Investing in Gold Through Mutual Funds

Difference between Gold ETF and Gold Mutual Fund

Let’s look at the difference between gold ETFs and gold mutual funds based on parameters.

• Investment method: You may invest in gold funds through SIP for even Rs. 500. It would give you units of the gold fund based on the existing NAV. Exchange-traded funds (ETFs) require you to purchase at least 1 unit. One unit of gold ETFs is equal to one gram of gold. Therefore, you will get 1 gram of gold when you purchase 1 unit of gold ETF. So, the minimum investment amount of ETFs is higher than gold mutual funds.

• Mode of holding: You can purchase and sell gold ETFs through a broker and a demat account. This is because they are traded on the stock exchange like equities. The ETFs are credited or debited from your demat account at the time of purchase. However, investing in a gold fund doesn’t have such an obligation.

• Systematic investment plan (SIP): You can invest in a gold mutual fund through SIP or lumpsum. The net asset value on the specific day is used for the transaction.

• Transaction costs: The yearly cost of gold ETFs is around 0.5–1%. The key expenses are the brokerage, expense ratio, and other charges. The annual closure price of gold mutual funds is between 0.6 and 1.2%. It includes the 0.1-0.2% management fee and the ETF fees. With gold ETFs, there are no exit costs. However, if you redeem a gold fund within a year, you may have to pay an exit load of 1-2%.

• Liquidity: ETFs are traded on stock exchanges. So, there must be enough buyers to sell your holdings. The ETF market is relatively small in India. So, gold ETFs are less liquid. However, gold mutual funds are relatively more liquid as they can be purchased and sold quickly.

Factors to Consider When Choosing Between Gold ETF and Gold Mutual Fund

When deciding between a gold ETF and a gold mutual fund, you should consider several factors. One important factor is liquidity. Gold ETFs offer greater liquidity as they can be bought and sold on stock exchanges at market prices during trading hours. In contrast, gold mutual funds are only redeemable at the day’s NAV, which offers less flexibility.

Another factor is cost-efficiency. Gold ETFs generally have lower expense ratios compared to gold mutual funds, making them a more affordable option for investors looking to minimise costs.

Ease of access is also significant. Gold mutual funds can be purchased directly without the need for a demat account, making them more accessible to new investors. However, gold ETFs require a demat and trading account, adding an extra step for those unfamiliar with stock market processes.

Finally, consider the investment objective. If you are seeking direct exposure to gold prices, you may prefer ETFs. However, if you are looking for diversified exposure to gold-related assets, you might find mutual funds more attractive. Evaluating these factors based on your financial goals and risk tolerance is crucial.

Conclusion

Gold ETFs generally invest in gold bullion and futures. Contrarily, gold mutual funds invest in stocks in the gold industry. Gold ETFs allow you to invest in gold without paying extra fees like exit loads and expense ratios. On the other hand, gold funds allow you to invest through SIPs for even Rs.500 per month. Investors can invest in gold funds if they want to make regular investments for a long period of time. However, gold ETFs are a good choice if you plan to convert the holdings into physical gold.