For many Indians, gold is more than just a precious metal; it symbolizes enduring treasure. Over time, the emotional attachment to gold has only intensified, serving as an effective hedge against inflation and a complement to equity investments. Asset diversification through gold is a long-standing practice.

However, the methods of investing in gold have evolved. Storing physical gold involves risks and costs, leading many investors to seek alternatives.

Digital gold has gained popularity, along with Gold Exchange Traded Funds (ETFs) and Gold Mutual Funds. This blog will explore these two investment avenues.

What Is A Gold ETF?

Gold ETFs are passively managed investment tools designed to invest in 99.5% pure gold. Each unit is equal to one gram of gold. Functioning like a hybrid of mutual funds and stocks, these ETFs are traded on stock exchanges and recreate the returns of a gold index. A Demat account is necessary for investment in Gold ETFs.

What Is A Gold Mutual Fund?

A Gold Mutual Fund, or Gold Fund, is an open-ended Mutual Fund that invests in Gold ETF units with a goal to generate income from 99.5% pure gold. While these funds emulate the objectives of Gold ETFs, they solely invest in Gold ETFs, not in shares of gold-related companies.

This distinction is pivotal. Gold Mutual Fund returns hinge on gold price fluctuations, unlike thematic funds that depend on the companies invested in.

Similarities Between Gold ETFs and Gold Funds

Alternative to Physical Gold

Both offer investment solutions in gold without the challenges of physical storage. They pool investor resources into gold-related financial instruments.

• Diversification of Portfolio

  Gold ETFs and Funds allow diversification beyond equities and debts. Typically, gold and equity markets see-saw, where low equities often mean high gold returns, forming a portfolio hedge.

• Cost of Each Unit

  The Net Asset Value (NAV) of both ETFs and funds changes daily with market conditions. Gold Funds are purchased or redeemed at daily NAV, while ETFs trade based on real-time stock market prices.

Differences Between Gold ETFs and Gold Funds

• Investment Method

  Gold Funds offer SIP investments starting at INR 500. Gold ETFs require the purchase of full units, equating one unit to one gram of gold, generally necessitating a higher initial investment.

• Mode of Holding

  Gold ETFs require a Demat account for transactions via a broker. In contrast, Gold Funds are accessible without one, suitable for SIP or lump-sum investments.

• Costs Involved

  Gold ETFs have annual expenses including demat and brokerage fees around 0.5-1%, while Gold Funds incur slightly higher costs, averaging 0.6-1.2% annually. No exit loads apply to ETFs, whereas a 1-2% exit load might apply to Gold Funds for early redemption.

• Liquidity

  Gold ETFs, traded on the stock exchange, can be illiquid due to market size in India, whereas Gold Funds offer easier purchase and redemption processes.

Conclusion

In conclusion, the choice between Gold Funds and ETFs depends on your investment style. For systematic, long-term investment, Gold Funds are suitable. For those with a Demat account or looking to convert holdings to physical gold, consider ETFs. Ultimately, the decision is tailored to your preferences.