Gold ETF vs Gold Fund – Choose The Best Investment Option

Gone are the days when buying physical gold was the only way to invest in the precious metal. Now, you have several options for investing in the paperless form of the yellow metal. Gold Exchange Traded Funds (Gold ETFs) and Gold Funds are two of them. In this article, let us discuss what are the differences between Gold ETF and Gold Funds.

What are Gold ETFs?

Gold ETFs are financial instruments that are designed to track the price of gold. They are listed and traded on stock exchanges, just like shares of individual companies. In India, Gold ETFs are regulated by the Securities and Exchange Board of India (SEBI) and can be purchased through a stockbroker or an online trading platform. When you invest in a Gold ETF, you are essentially buying units that represent ownership of physical gold held in a vault by the fund’s custodian. The value of these units is directly linked to the price of gold and fluctuates in line with changes in the market. One of the primary advantages of investing in Gold ETFs is that they offer a convenient and cost-effective way to invest in precious metals without the need to physically store them. Additionally, Gold ETFs can be bought and sold in small quantities, making it easy for individual investors to participate in the gold market.

Features of Gold ETFs

Here are some of the key features of Gold ETFs:

1. Tracking the price of gold: Gold ETFs are designed to track the price of gold, so they are highly correlated with the price of the metal. This means that as the price of gold rises or falls, the value of the Gold ETF will move accordingly.
2. Easy to trade: Gold ETFs are traded on stock exchanges like stocks, making them easy to buy and sell. They can be bought and sold through a brokerage account, like stocks, and traded throughout the day.
3. Low costs: Gold ETFs typically have low expenses compared to other types of gold investments. The expense ratio for a Gold ETF is typically less, making it an attractive option for investors who want exposure to gold but don’t want to pay high fees.
4. Diversification: Investing in a Gold ETF can provide diversification for an investment portfolio. By holding a Gold ETF, investors are indirectly investing in a variety of gold-related assets, such as gold mining companies and gold futures contracts.
5. Liquidity: Gold ETFs are highly liquid, meaning they can be bought and sold quickly and easily. This makes them a popular choice for investors who want exposure to gold but don’t want to deal with the costs and inconvenience of buying and selling physical gold.

Who Should Invest in Gold ETFs?

They are a popular investment choice for investors who want to gain exposure to the price of gold without owning physical gold. Here are a few types of investors who can invest in Gold ETFs:

1. Investors who want to diversify their portfolio by including an asset that has a low correlation with the stock market may consider investing in gold ETFs. Gold tends to have an inverse relationship with the stock market, meaning when the stock market is down, gold prices tend to go up.
2. Gold is often considered an inflation hedge because its value tends to rise during times of inflation. Investors who are concerned about inflation may also consider investing in Gold ETFs as a way to protect their portfolio.
3. Gold ETFs can also be a good choice for long-term investors who want to hold onto their investments for several years. Over the long term, gold has historically held its value and can provide a good hedge against economic uncertainty.
4. Risk-averse investors who want a relatively safe investment may consider investing in Gold ETFs. While there is still some risk involved in investing in gold, it is generally considered less risky than investing in individual stocks or other types of investments.

It’s important to note that Gold ETFs are not suitable for everyone, and investors should carefully consider their investment goals and risk tolerance before investing in any type of asset. It’s also a good idea to consult with a financial advisor before making any investment decisions.

Best Gold ETF in India

Here are the five best Gold ETFs based on 5-yr CAGR available in India:

The above data is as of 23rd March 2023. Please note that this list is not exhaustive, and it’s always a good idea to do your own research before investing in any financial product.

What are Gold Funds?

Gold mutual funds refer to mutual funds that invest in various forms of gold. It could be in physical gold, Gold exchange-traded funds (ETFs), and gold mining stocks. These funds are managed by professional fund managers who invest on behalf of the investors. Investors who want to invest in gold but do not want to physically own it can invest in Gold mutual funds. These funds offer a convenient way to invest in gold as they eliminate the need for storage, security, and insurance associated with physical gold ownership.

What are the Features of Gold Mutual Funds? 

1. Investment in gold: Gold funds invest primarily in physical gold or in securities of companies engaged in gold-related activities such as mining, refining, or trading.
2. Diversification: Gold funds offer investors diversification benefits as they provide exposure to the gold market without owning physical gold. Diversification can help to reduce the risk of the portfolio.
3. Liquidity: Gold funds are highly liquid investments as they can be bought and sold on the stock exchange like any other mutual fund.
4. Low cost: Gold funds have lower management fees than other investments in gold, such as buying physical gold, making them a cost-effective way to invest in the metal.
5. Tax efficiency: Gold funds are subject to a long-term capital gains tax of 20% with an indexation benefit, which can be a tax-efficient way to invest in gold.
6. Transparency: Gold funds provide transparency to investors as the Net Asset Value (NAV) of the fund is calculated and published daily. Investors can also track the performance of the fund through various financial websites and the fund’s official website.
7. Convenience: Gold funds can be bought and sold through online platforms or through a broker, making it a convenient way to invest in gold without the hassle of storage and security concerns associated with owning physical gold.

Who Should Invest in Gold Funds?

Investing in Gold funds in India can be a good option for investors who want to diversify their portfolios and hedge against inflation. However, investors should also be aware that Gold funds can be volatile, and their value can be affected by various factors such as fluctuations in gold prices, currency movements, and geopolitical events. It is recommended that investors consult with a financial advisor before investing in Gold funds.

Gold Funds vs Gold ETF: What’s the Difference?

Both Gold Funds and Gold ETFs are investment options that allow investors to invest in gold. However, there are some differences between the two:

Structure: Gold Funds are mutual funds that invest in gold, while Gold ETFs are exchange-traded funds that track the price of gold.

Investment method: Gold Funds can be invested in through a lump sum investment or a systematic investment plan (SIP), while Gold ETFs can be bought and sold on the stock exchange like any other share.

Expense ratio: Gold Funds tend to have a higher expense ratio than Gold ETFs, which means that the cost of managing a Gold Fund is relatively higher.

Liquidity: Gold ETFs are more liquid than Gold Funds as they can be traded on the stock exchange like any other share. Gold Funds, on the other hand, can take longer to redeem due to the process of selling units to the fund house.

Minimum investment: Gold Funds usually have a lower minimum investment requirement compared to Gold ETFs, making them more accessible to retail investors.

Tax implications: Gold ETFs are generally more tax-efficient than Gold Funds because they are structured as ETFs. This means that ETFs have fewer taxable events, such as capital gains distributions, than mutual funds.

Gold ETF vs Gold Mutual Fund – Which is Better to Invest?

Both Gold ETFs and Gold mutual funds are investment options that provide exposure to gold as an asset class. However, there are a few differences between Gold ETF and Gold Mutual Fund, the two that can affect which option is better for you.

• Gold ETFs (Exchange Traded Funds) are like stocks that are listed and traded on a stock exchange. These funds invest in physical gold or gold futures contracts, and their prices fluctuate with the market price of gold. Gold ETFs can be bought and sold throughout the day like stocks, and their prices are transparent and readily available.
• On the other hand, gold mutual funds are open-ended funds that invest in gold and other precious metals such as silver. The prices of these funds are determined based on the net asset value (NAV) of the fund, which is calculated at the end of each trading day. Gold mutual funds can be bought and sold through a fund house, and they usually have higher expense ratios than gold ETFs.

Now, to answer the question of which is better, it depends on your investment objectives and preferences. If you are looking for an investment option that offers more liquidity and transparency, then gold ETFs may be a better choice for you. They also have lower expense ratios compared to gold mutual funds. However, if you prefer a more diversified exposure to precious metals or if you are investing for the long term, gold mutual funds may be the right choice for you.

Conclusion

Ultimately, the decision to invest in Gold Funds vs Gold ETFs will depend on an individual’s investment goals, risk tolerance, and investment preferences. Both options offer exposure to the price of gold and can be useful in diversifying a portfolio, but they differ in their structure, cost, liquidity, tax implications, and investment minimums. Investors can use extra benefits offered by third-party sites or brokerage sites such as Angel One, which is also a safe choice when it comes to investing.

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