Which is a better investment: Gold mutual funds or gold ETFs? | Mint (2024)
The repo rates have been hiked, the stock market is in red and the rising inflation rate is slowly eating into the value of our savings. No investment looks good enough for future prospects. Gold with its sporadic and short bursts of price increase seems more promising than other investment options. Buying physical gold and storing it may not be easy. Liquidating it when required can be cumbersome. Sovereign gold bonds (SGBs) have a lock-in period of a minimum of five years, which means that you have to wait a while before redeeming the same. You are now left to choose between gold exchange-traded funds (ETFs) and digital gold or gold mutual funds.
Gold mutual funds are different from gold ETFs despite both being bought via the web. Not many investors are aware of how these two differ and, hence, some information regarding the same would be useful before you dive in to invest in the yellow metal.
To start with, gold mutual funds invest in gold ETFs while the latter invest in gold of 99.50 per cent purity.
You need a Demat and trading account to invest in gold ETFs. However, you can always invest in gold mutual funds either online (direct mutual funds) or through an agent (regular mutual funds).
You can start investing in gold mutual funds with a minimum investment of Rs 1000. However, the minimum investment required for gold ETFs would be equal to or more than the current price of one gram of gold.
Like other mutual fund investors, those parking money in gold mutual funds must pay an exit load on redeeming units within a year. Comparatively, gold ETFs are cheaper as there are no exit loads to be paid.
Redeeming gold ETFs is easy than that in gold mutual funds. Since gold ETFs are traded on stock exchanges, you can buy or sell units at any time of the day during trading hours. You can however opt for the redemption of gold mutual funds only at the end of the day. To buy fresh units, you have to apply to the fund house for fresh purchases.
You can invest in gold mutual funds via the systematic investment plan (SIP) route. The SIP mode of investment does not exist for gold ETFs.
Gold prices do not fluctuate as rampantly as equity investments. The price of gold remains more or less stable within a range barring short bursts of price rise owing to macro factors. An effective hedge against inflation, many people invest in gold not only for its shine but also for its investment value. Many investment managers opine how you must allocate at least 10-15 per cent of your investments in gold. However, the mode of investing in gold varies and depends on your ease, convenience and how you factor in liquidity in your investments.
A gold fund is a type of investment fund that holds assets related to gold. The two most common types of gold funds are those holding physical gold bullion, gold futures contracts, or gold mining companies. Gold funds are popular investment vehicles among investors who wish to hedge against perceived inflation risks.
(ETFs) offer higher liquidity than physical gold, allowing you to buy and sell shares quickly through financial markets without the logistical challenges of physical gold transactions.
Comparatively, gold ETFs are cheaper as there are no exit loads to be paid. Redeeming gold ETFs is easy than that in gold mutual funds. Since gold ETFs are traded on stock exchanges, you can buy or sell units at any time of the day during trading hours.
Gold ETFs can easily be bought and sold throughout the day, just like stocks. Benefits of gold ETFs include convenience, liquidity, and fractional ownership. Drawbacks of gold ETFs include counterparty risk, tracking errors, and lack of physical ownership.
Though sovereign gold bonds are among the safest avenues to invest in gold in India, some risk is still there. The sovereign default risk exists due to the fact that sovereign gold bonds (SGBs) are not backed by physical gold but instead by a derivative of gold issued by the Indian government through the RBI.
Regulatory uncertainty can impact gold prices to a large extent. Price fluctuation: The price of gold can be volatile in times of geopolitical uncertainties.
If you're looking for the security of a tangible asset, gold bullion coins may be an excellent option. On the other hand, you may prefer gold ETFs and mutual funds for easy exposure to gold investments without the need for physical storage.
Downsides of gold ETFs include exposure to counterparty risk, annual fees, and the possibility the fund fails to properly track the price of gold. Another drawback is that you don't physically own the gold.
The ETF shares are therefore not supported by an equivalent amount of physical gold. In the event that the bank or institution issuing the ETF becomes insolvent, then it is very unlikely that its share owners would be able to recoup their investment.
Traditional mutual funds tend to be actively managed, while ETFs normally adhere to a passive index-tracking strategy and therefore have lower expense ratios. For the average gold investor, mutual funds and ETFs are generally the easiest and safest way to invest in gold.
If you consider to hold physical gold for a long period of time without any intention to sell part of your investment overtime, gold bars will be the best option for you. They will cost you less per gram compared to gold coins. This is because of their lower premium, as explained below.
Physical gold provides long-term stability and more security when the economy spirals. Gold ETFs give you that true physical gold feel as an investment but offer higher liquidity and less logistical challenges as owning the actual metal.
Unlike physical gold, which requires secure personal storage, Digital gold is stored in high-security vaults managed by the service provider, eliminating the need for personal storage. Further, digital gold can be bought and sold online instantly, providing greater liquidity.
Gold BeES has an impact cost of 0.02 percent (as of July 2024, on the NSE) and is the lowest among Gold ETFs. Gold FoF invests predominantly in Gold ETFs only. Investors without demat accounts can consider buying gold FoFs. The good part about gold FoFs is that they allow systematic investment plans (SIPs).
Introduction: My name is Terrell Hackett, I am a gleaming, brainy, courageous, helpful, healthy, cooperative, graceful person who loves writing and wants to share my knowledge and understanding with you.
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