Gold Investment Strategies: Gold ETFs vs Gold Mutual Funds, Which One Should You Choose?

Nov 13, 2023 / Reading Time: Approx. 10 mins

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Gold Investment Strategies: Gold ETFs vs Gold Mutual Funds, Which One Should You Choose?

For Indians, the love for gold is enduring, the sentimental value of gold has only increased over the last few decades. Currently India stands as the world's 2nd largest consumer of gold, after China, with a rich tapestry of festivals, customs, and traditions, and the precious yellow metal is an integral part of our cultural legacy.

You may all own some gold investments in the form of jewelry, since gold is one of world's most valuable precious metals that has continues to be a popular investment for ages. Festivals like Akshaya Tritiya, Dussehra, Dhanteras and Laxmi Puja during Diwali are among the numerous auspicious occasions to purchase gold. You may consider reading Why Investing in Gold This Dussehra Would Be a Good Idea...

Gold's eternal value has appealed to many individuals since time immemorial. It is considered a safe haven, a hedge against inflation and recessions, and an ideal portfolio diversifier during downturns in other asset classes and the economy.

For centuries, Gold has been regarded by investors as one of the safest and most lucrative investment options. However, the approach to gold investment has evolved over time. Physical gold storage has become of a source of concern for many people due to the expense of storage and the possibility of theft.

There are various ways to invest in gold besides gold bars and coins, Gold mutual Funds are popular amongst investors. They are classified into two categories: 1) Gold Exchange Traded Fund, and 2) Gold Savings Fund. Both are pooled investment funds that give you exposure to gold through a mix of assets.

If you are curious about these two investment options, we have got you covered in this article. When you consider investing in gold, it's important to understand the difference between these two investment options and choose the best Gold mutual fund as per your suitability.

What is Gold Exchange-Traded Funds (Gold ETFs)?

Gold ETFs are a part of Gold mutual funds under the exchange-traded funds category, these investment vehicles that are managed passively with the goal of investing in 99.5% pure gold. The units purchased will be backed by 0.995 finesse of physical gold by the respective fund house, 1 unit of gold ETF is equivalent to 1 gram of gold.

To gain exposure to gold without having the hassle of physically holding it, a Gold ETF is a worthwhile option. The investment objective of a Gold ETF is to generate returns broadly in line with the domestic price of gold. If the value of gold appreciates, you, the investor benefits.

[Read: Gold ETFs: An Effective Portfolio Diversifier]

As per the guidelines set forth by the Securities and Exchange Board of India (SEBI), the physical gold is held in vaults by an appointed custodian for the ETF on your, the investors' behalf. It is also insured and valued on a regular basis.

ETFs are investment choices that combine equities and mutual funds; they can be traded on a stock exchange like stocks and are managed similarly to mutual funds. They mirror an index, in this case, a Gold index, and aim to replicate the index's returns. You require both a trading and a demat account in order to invest in a Gold ETF.

  • The purchase order can be placed through your broker - similar to buying shares on the recognised stock exchange.

  • Gold ETF units will be reflected in your demat account (on a T+2 basis). Note that investments in Gold ETFs cannot be made through the Systematic Investment Plan (SIP) route.

  • In case, you wish to convert your Gold ETF units into physical gold in future, that is possible only for a certain quantity (usually 1 kg.) it takes around 2 to 3 working days.

What are Gold Mutual Funds?

A Gold Mutual Fund or Gold Savings Fund is an open-ended mutual fund scheme that invests in units of underlying Gold ETFs, which benchmarks the performance against the prices of physical gold. The aim of this mutual fund scheme is the same as Gold ETF, i.e., to invest in gold of 99.5% purity and generate capital appreciation.

A fund manager oversees the purchase and sale of assets for each gold mutual fund in accordance with the investment goal of the fund. It is not necessary to have a Demat account in order to invest in a Gold Savings Fund.

[Read: All You Need to Know About Gold Mutual Funds]

Like any other mutual fund scheme, you can invest in Gold Savings Funds by approaching your mutual fund distributor or the fund house. A Gold Savings Fund's units will be bought at the fund house's announced NAV. In contrast to Gold ETFs, investors in Gold savings funds can choose the SIP option with as low as Rs 500/-, and in certain cases, Rs 100/-.

It is crucial to remember that gold mutual funds do not really invest in the stocks of firms that mine, refine, process, or package gold; instead, they only make investments in gold through Gold exchange-traded funds (ETFs). And when choosing which mutual fund to invest in, this needs to be a key factor. The performance of the Gold Mutual Fund will be influenced by fluctuations in the actual price of gold.

Although Gold mutual funds and Gold ETFs are similar, there are some important distinctions to take into account.

Gold mutual funds vs Gold ETFs

1. Minimum Investment Amount

With a single SIP investment, you may purchase units of a Gold mutual fund for as little as Rs 500. The units are awarded based on the current NAV of the gold fund on that particular day. On the other hand, investing in Gold ETFs requires you to purchase ETF units, with a minimum purchase requirement of one unit.

Currently, one unit of Gold ETFs is equal to one gram of gold. As a result, purchasing 1 unit of Gold ETF equates to purchasing 1 gram of gold, compared to gold mutual funds, the minimum investment amount required for ETFs is larger.

2. Demat Account

The only ways to purchase and sell Gold ETFs are through a broker and a Demat account since they are traded on the stock exchange like stocks. On the other hand, investing in Gold Mutual Fund or Gold Savings Fund is not subject to any such requirements.

3. Cost of Investment

The key costs for investing in Gold ETFs include demat charges, expense ratio, etc., taking the annual cost to approximately 0.5 - 1%. There are no exit loads applicable on Gold ETFs, whereas, for Gold mutual funds, you may have to pay an exit load in the range of 1-2% on redemption within a year.

It only comes down to whatever investment strategy you find more convenient, as the costs associated with the two are not that different.

4. Liquidity Factor

Since Gold ETFs are traded on stock exchanges, they are liquid; nonetheless, the ability to sell your holdings when you want to does depend on the availability of the ideal number of buyers.

Since Gold mutual funds are easily purchased or redeemed at any moment, just like any other equity mutual fund scheme, they are likewise regarded as liquid. To sell mutual fund units, one must submit an online or offline request, and it will be liquidated in 3 to 4 business days.

What are the tax implications for Gold mutual Funds vs Gold ETFs?

The Finance Bill 2023's passing has altered how Gold mutual funds are taxed. The indexation benefit that, in the case of Long-Term Capital Gains of these schemes, helped lower the tax burden (by accounting for the cost of the inflation index), is no longer accessible under the new tax regulation.

[Read: Why It Still Makes Sense to Invest in Gold Mutual Funds Despite the Change in Tax Rule]

Just like in the case of a debt mutual fund scheme, the returns on Gold mutual funds and the capital gains on the sale of Gold ETF units are now subject to taxation at the marginal rate, or according to your income-tax slab.

Why one should consider investing in Gold via Mutual Funds or ETFs

Whether you choose a Gold ETF or Gold Savings Fund, there are benefits over holding gold in the form of investment, such that you do not have to worry about storage or holding costs, risk of loss, theft, and sufficient flexibility and liquidity. It is a hassle-free and smart way to invest in gold.

Apart from gold being a safe haven for investors, there are a few compelling factors that make a case for investing in gold strategically.

As the IMF has warned, persistent geopolitical tensions with other countries, such as the Israel-Gaza War, disputes between the United States and China, etc., are becoming a major threat to the macro-financial stability. Disruptions in the supply chain pose a risk to the inflation trajectory.

The Indian economy is seen as a 'bright spot', in spite of several difficulties, it is performing noticeably better than many other emerging market and advanced economies. In light of this, it makes sense to include gold in your investment portfolio as it will help you navigate the volatile and ever-changing financial landscape.

There have been years when equities have disappointed investors, like in the years 2015, 2018, and 2022 and when gold has played its role of being an effective portfolio diversifier. Moreover, the domestic demand for gold would remain buoyant, particularly during the festive and wedding season.

One may consider strategically allocating around 10% to 15% of their entire investment portfolio towards gold and hold with a long-term approach (of over 5 to 10 years) by assuming moderately high risk.

To conclude...

While Gold mutual funds and Gold ETFs are both viable investment options, your decision depends on your personal investment goals, time horizon and risk tolerance. Gold mutual funds are an excellent option if you want to invest consistently over an extended period of time. Gold ETFs, on the other hand, are a good choice if you want a Demat account and there's a potential need to convert the gold into physical gold.

Whichever option you choose, it's essential to conduct thorough research before investing, weigh the benefits and drawbacks of each, and compare the best Gold mutual fund scheme to find the suitable one for your portfolio.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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