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Gold Mutual Funds Vs. Gold ETFs

  • Akarshita Yaji
  • Jan 12 2022
  • 5 minutes
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As an investor you must be aware of the various ways of investments available in the market. While it sometimes gets confusing for new investors to choose where to invest their money, there are a few popular methods of investments in the market.

Investing in gold is one such popular method which is largely preferred by investors. But as with any other investments even gold investments have different ways that investors can choose from. 

Through this article we will have a brief look at both Gold Mutual Funds and Gold Exchange Traded Funds (ETFs) and the differences between the two which will help you decide which a better option of investment for you is.

What are Gold Mutual Funds?

Gold mutual funds are open ended funds that invest directly or indirectly in gold units of a Gold Exchange Traded Fund (ETF). The primary goal of Gold Mutual Funds is to create wealth through investing in gold physically or through stocks of gold producing and mining companies.

Investing in gold is considered a lucrative opportunity for investors because gold as a commodity commands value and is considered as a hedge against adverse economic conditions.

If you invest in gold funds for a long term, the returns you receive will be according to the current gold price, which can prove beneficial if the prices have increased at the time of redemption.Similar to mutual funds, each gold fund has a fund manager who manages the individual fund based on the objectives for the fund.

Gold mutual funds are taxed similar to the gold jewelry owned by you. If you invest in Gold Mutual Funds for less than three years, the investment is treated as short term and the tax is added to the individual’s annual income tax. However, if you invest in Gold Mutual Funds for more than three years, it is considered to be a long term investment and is taxed at 20% . 

Advantages of Investing in Gold Mutual Funds

  • Gold mutual funds offer high liquidity. These funds can be liquidated anytime and on a short notice without much laboursome process. There is also no low limit on the redeemable amount so, you can redeem as per your requirement.
  • The investment amount starts at as low as Rs 500. Hence, even people with low income can invest in Gold Mutual Funds.
  • Gold mutual funds are a safer investment option with less risks associated and it is also safer than owning gold physically.

What are Gold Exchange Traded Funds (ETFs) ?

As opposed to gold mutual which invests in units of Gold Exchange Traded Funds (ETFs) as primary assets, Gold Exchange Traded Funds invest in gold as a principal asset. The units of Gold Exchange Traded Funds (ETFs) are traded as units of stocks, with one unit of gold Exchange Traded Funds (ETFs) being equivalent to one gram of gold.

Gold Exchange Traded Funds (ETFs) are a commodity based fund but it can also be used as an industry traded fund.Gold Exchange Traded Funds (ETFs) are a great option of investment for those who want to improve their investment portfolio and they also work as defensive assets in the fluctuating market. 

Taxation on Gold Exchange Traded Funds (ETFs) is similar to that which is applied to owning physical gold. For a short term investment, that is an investment of less than 36 months, taxes are applied according to the annual income tax paid by the individual. For a long term investment which is an investment of more than 36 months, the taxes are applied at a rate of 20% .

Advantages of investing in Gold Exchange Traded Funds (ETFs)

  • The advantages of investing in Gold Exchange Traded Funds are more or less similar to gold mutual funds.
  • They are highly liquid and can be redeemed anytime.
  • They are easy to trade and easier if you are trading through a stock broker or stock manager.
  • Gold Exchange Traded Funds (ETFs) are relatively safer and have minimal market risks.

Gold Mutual Funds or Gold Exchange Traded Funds (ETFs) : Know the Difference!

To know which investment suits you better, it is necessary to know the differences between the two.

Gold Mutual FundsGold Exchange Traded Funds (ETFs)
PricingPriced by NAVPrices listed on Stock exchange list
Investment ModeDemat account not requiredDemat account is required
SIPsYou can invest through SIPsYou cannot invest through SIPs
Minimum Investment AmountRs. 500Depends on the price of gold
Transaction CostNo costs if applied through direct investment platforms like Finity Brokerage and Demat costs to be considered
Expense RatioHighLow
LiquidityHighMay be low 

As you can see, there are advantages and disadvantages to both the options. If you are already investing in stocks and shares and have an existing DEMAT account you could invest in gold through ETFs as the costs involved there are lesser. But if you are looking at convenience and liquidity, gold mutual funds should be your choice. However, what suits your financial goals will completely depend on you and that should be the parameter you make your choice on.

FAQs

  1. What is the main difference between Gold Mutual Funds and Gold Exchange Traded Funds (ETFs) ?
    While Gold mutual funds are a fund to fund trade option, Gold Exchange Traded Funds (ETFs) are a commodity based trade option that considers gold as a primary asset.
  1. What are the advantages of investing in gold based funds?
    Gold based funds have high liquidity and low risk as compared to any other investment option. Also the investment amount is low, so even people with low income can invest in these funds and enjoy the benefits. There is also no low redeemable so you can redeem as per your financial requirements. 
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