Gold Mutual Funds vs Gold ETF
Gold’s allure for the Indian people will never fade. Gold’s symbolic worth has only grown over the last several decades, and any astute investor understands that it also serves as a fantastic hedge against inflation and equities investments. Gold investments are not novel means of asset diversification. The method that gold is invested in, however, has evolved. Physical gold storage has become more inconvenient for investors due to the expenses associated with keeping it safe and the danger of theft. Gold Exchange Traded Funds (ETFs) and Gold Mutual Funds have grown in popularity alongside digital gold.
The modern gold investor has several options for getting exposure to gold investment procedures, including exchange-traded funds (ETFs), mutual funds, and even purchasing bullion from a local jeweller.
To compare Gold Mutual Funds vs Gold ETF, it is necessary to first comprehend the essence of each of these financial vehicles.
Read: Is Demat Account Required for Mutual Funds?
What is an ETF for gold?
It carries hazards to keeping gold in its physical form at home. Holding gold in the form of an ETF (exchange-traded fund) is far more practical than owning real gold. Unlike real gold prices, which fluctuate throughout India based on region and the demand-supply dynamic, gold ETFs are passively managed and accurately represent the current gold prices. In addition, gold ETFs are less expensive than purchasing or disposing of actual gold.
A fund manager’s only responsibility in these plans is to purchase gold bullion and deposit it with the scheme’s custodian. Gold ETFs are listed on the stock market. These ETFs provide the same return as genuine gold and mirror the price of gold. The cost ratio and tracking inaccuracy of the strategy are the primary factors that differentiate the returns between ETFs and actual gold. Better refunds for clients result from a smaller tracking error.
For those who consider gold as an investment rather than something to utilise for jewellery or personal usage, investing in gold ETFs is a great option.
What is a mutual fund for gold?
A select few brokerage firms enable clients to buy gold ETF units on a recurring basis. The amount of units that may be acquired at the time of each transaction must be specified by the investors in these arrangements. The majority of investors find this to be quite inconvenient. Additionally, holders of gold ETFs must have Demat accounts.
Fund firms began marketing gold mutual funds as a solution to this issue. Mutual funds for the acquisition of gold invest in plans to buy gold ETFs. The value of gold ETF units, which in turn reflect the value of real gold, is tracked by gold mutual funds. The performance of the underlying asset determines how much money these mutual funds earn. Returns on gold mutual funds are impacted by changes in the NAV of gold ETFs units.
Gold Mutual Funds vs Gold ETF | Major Difference
Method Of Investment And Amount
While you could invest in a Gold fund via SIP in multiples beginning as little as Rs 500, which would provide you units of the gold fund based on the day’s NAV, while investing in ETFs you must purchase units of ETFs, with a minimum purchase of 1 unit. One unit of gold
exchange-traded funds corresponds to one gramme of gold. Therefore, one unit of a gold ETF corresponds to one gramme of gold. Due to this, ETFs have a greater minimum investment requirement than Gold mutual funds.
Mode Of Holding
Since Gold ETFs are exchanged on the stock market in the same way as stocks, only a broker and a Demat account may be used for buying and selling. When you purchase or sell ETFs, the funds are deducted from or credited to your Demat account. Investing in a Gold Fund, on the other hand, has no such prerequisite.
Without a Demat account, you may invest in a gold mutual fund through a SIP or a lump payment. The transaction occurs at the Net Asset Value (NAV) of the day in question.
Expenses Involved
Key expenses for gold ETFs include Demat fees, the expense ratio, and brokerage fees, bringing the yearly cost to between 0.5 and 1 percent. The annual expense ratio for gold mutual funds is between 0.6% and 1.2%, which includes the gold ETF expenses listed above plus 0.1% to 0.2% for managing the gold. On redemption within a year, there are no exit costs applicable to Gold ETFs, while gold funds may impose an exit penalty ranging from 1% to 2%. It comes down to which type of investing you find more convenient, given that the difference in fees between the two is not substantial.
Liquidity
ETFs in India are generally illiquid due to the fact that they are traded on stock exchanges, which necessitates an optimal number of interested purchasers when you choose to sell your shares. Given the tiny size of the ETF market in India, gold ETFs are less liquid than gold mutual funds, which may be acquired and sold with reasonable ease.
Gold Mutual Funds vs Gold ETF: Conclusion
Despite the fact that gold funds and ETFs are both legitimate investment alternatives, choosing between the two may be a matter of personal preference. If you prefer to make systematic long-term investments, you might choose gold funds. You may use gold ETFs if you want a Demat account and there is a potential that you will need to convert the gold into physical gold. The decision is yours!
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