For Indians, the love for gold is undying. The sentimental value of gold has only increased over the last few decades, and in fact, the smart investor knows that gold can be a great hedge against both inflation and equity investments. When it comes to the diversification of assets, investing in gold is not new. What has changed, though, is the way we invest in gold. More and more investors have increasingly found storing physical gold a hassle because of storing costs and the risk of theft. Digital gold has become popular and so have other gold investment optionslike Gold Exchange Traded Funds (ETFs) andGold mutual funds.
If you are curious about these two investment options, we have you covered in this blog.
What Is A Gold ETF?
Gold ETFs are passively managed investment instruments that aim to invest in gold of 99.5% purity. 1 unit of gold ETF is equivalent to 1 gram of gold. ETFs are investment options with a mix of mutual funds and stocks; while they are managed like mutual funds, they can be traded on the stock exchange like stocks. They mirror an index, in this case, a gold index, and aim to replicate the index’s returns. To invest in a gold ETF, you need to have a Demat account.
What Is A Gold Mutual Fund?
A Gold Mutual Fund or Gold Fund is an open-ended Mutual Fund that invests in units of Gold ETFs. The aim of this fund is the same as Gold ETF, i.e., to invest in gold of 99.5% purity and generate income. Each gold fund has a fund manager who manages the buying and selling of assets on the basis of the fund’s investment objective.
Here, it is very important to note that gold mutual funds only invest in gold via Gold ETFs and not directly in the stocks of gold mining, refining, processing, and packaging companies. The mutual funds that invest in these companies fall under the thematic category as per SEBI and should not be confused with the gold mutual funds we discussed above. And this must be an important consideration when deciding which mutual fund to invest in. While the gold mutual fund’s performance will depend on the fluctuations in the physical gold price, the performance of a thematic gold fund will depend on the companies and themes it is invested in.
Let us see the differences and similarities between both so that it helps you make an informed investment decision.
How Are Gold ETFs And Gold Funds Similar?
Investment In An Alternative To Physical Gold
Both Gold ETF andGold Funds offer you a way to invest in gold without physically storing it and by removing the risk of threat and purity issues. Both investment options pool money from the investors and invest that corpus in gold-related securities.
Diversification Of Portfolio
Gold ETFs and Gold Funds provide investors with an easy way of diversifying their portfolios beyond equity and debt. As has been observed in the recent past, the gold and equity markets are often found to follow a see-saw pattern, i.e. when one is low, the other is high, and vice versa. This provides a sufficient hedge to your portfolio. For example, if the equity markets are low, the gold markets are typically doing well, and vice versa. This helps you to maintain a balance in your portfolio because if your equity mutual funds are underperforming, the probable better performance of Gold Mutual Funds/ ETFs can save the whole portfolio from underperforming.
Cost Of Each Unit
Both Gold ETFs and Gold Funds have theNet Asset Value (NAV) calculated at the end of any business day. The NAV is impacted by the rise and fall of gold prices and/or by the change in the value of their underlying assets. Having said that, while gold funds are purchased and redeemed as per that day’s NAV, gold ETFs are traded on the stock exchange at the market price which may or may not be the same as the NAV of the day.
How Are Gold ETFs And Gold Funds Different?
Investment Method And Amount
While you can invest in a Gold fund through SIP in multiples starting from as low as INR 500 that fetch you units of the gold fund basis the prevailing NAV of that day; when investing in ETFs, you have to buy units of ETFs and minimum you need to buy is 1 unit. In the case of gold ETFs, one unit is equivalent to 1 gram of gold. So when you buy 1 unit of gold ETF, you are actually buying 1 gram of gold. Due to this, the minimum investment amount needed is higher in ETFs compared to Gold Mutual Funds.
Mode Of Holding
Since Gold ETFs are traded on the stock exchange in the manner of stocks, the buying and selling transactions can only be done through a broker and a Demat account. When you buy or sell the ETFs, they get debited/credited to your Demat account. In contrast, there is no such requirement for investing in a Gold Fund.
You can invest in a gold mutual fund via a SIP or through a lump sum, without a Demat account. The transaction takes place at the Net Asset Value (NAV) of that particular day.
Costs Involved
The key costs for gold ETFs include demat charges, expense ratio, and brokerage charges taking the annual cost to approximately 0.5-1%. Gold mutual funds are close at 0.6-1.2% annually which is inclusive of the gold ETF charges mentioned above and 0.1-0.2% charges for managing the gold. There are no exit loads applicable on Gold ETFs, whereas, for gold funds, you may have to pay an exit load in the range of 1-2% on redemption within a year. The difference in the costs involved for both is not very high, hence, it boils down to which method of investment you find more convenient.
Liquidity
ETFs in India are largely illiquid because since they are being traded on stock exchanges, there needs to be an optimum number of buyers willing to buy when you want to liquidate your holdings. And given that the ETF market in itself is small in India, gold ETFs become relatively less liquid than gold mutual funds which can be purchased/redeemed quite easily.
Bottom Line
In conclusion, while gold funds and ETFs are both viable investment options, your decision between the two can be a call of convenience. If you wish to make systematic investments over a long period, you can go for gold funds. Whereas, if you wish to have a Demat account and if there is a possibility of you needing to convert the gold into physical gold, you can opt for gold ETFs. The choice is yours!
