Gold Mutual Funds Vs Gold ETF: Which One Should You Choose

Gold is considered an ideal safe haven when markets become uncertain; however, picking an investment vehicle for gold is not always easy. When trying to choose between a Gold Mutual Funds vs  Gold ETF, you must ask yourself which one gives better returns, lower fees, ease of investment, and flexibility.

Although both the methods involve buying gold in physical form and are meant to track its price performance, there are notable differences between them. While gold ETFs are traded on stock markets and need a demat account, gold mutual funds enable you to buy gold using SIP without the demat account.

In this guide, we'll compare Gold Mutual Funds Vs Gold ETFs across aspects to help you decide which option aligns with your financial goals and investing style.

Gold Mutual Funds Vs Gold ETF: Quick Answer

Gold mutual funds can be preferred when you want to begin with a low initial investment using SIP, and you do not have a demat account. Gold ETFs should be opted for when you are already trading on the stock market, and you require low expenses and real-time pricing. Gold mutual funds are for first-time investors and for those using SIP. Gold ETFs are ideal for experienced investors having demat accounts and desiring better tracking of the price of gold along with a low expense ratio. The key fact that users must know is that each type is backed by 99.5% pure gold and taxed similarly under the current rules.

What is a Gold Mutual Fund?

Gold mutual fund refers to an open-end investment fund where money from different investors is pooled together and invested in gold through purchasing units of a gold ETF as opposed to investing in physical gold. Some of the gold mutual funds in India even invest in stocks of gold mining and refining companies, meaning there is equity risk involved alongside gold price fluctuation. For most individuals seeking information on gold mutual funds in India, this type of mutual fund product is the one being purchased by them, irrespective of whether they use a demat account.

Benefits of Gold Mutual Funds

• Low Entry Point: SIPs start at ₹100 to ₹500 depending on the fund house, so you don't need a lump sum to begin.
• No Demat Account Needed: You can invest through a regular mutual fund folio, the same way you'd buy any other scheme.
• SIP-Friendly: Monthly, weekly, or even daily SIPs let you average out your purchase price over time instead of timing the market.
• Professionally Managed: The fund manager manages the process of buying, adjusting, and redeeming the assets for you.
• Easy to Monitor: Since prices are based on NAV, you need only monitor the investment once a day, not once every few minutes.

Risks & Limitations of Gold Mutual Funds

• Higher Total Cost: The fund invests in an ETF, and you will therefore end up with double expenses since there is the cost of the fund itself plus the cost of the ETF.
• Exit Load: There are many gold mutual funds that have a fee of between 1% and 2% whenever you withdraw your money within a limited period of time; sometimes just 15 days.
• Slightly Delayed Withdrawal: It takes about one or two days for the cash to be credited to your bank account upon withdrawing, while the case with an ETF is immediate.
• Tracking Error Compounds: It is a fund investing in another fund, which means any tracking error at the ETF level flows through to you as well.

What is a Gold ETF?

The term gold ETF stands for gold exchange-traded fund, which invests in gold bullion with a purity rate of 99.5 per cent and is listed and traded in the stock market, similar to a share of a company. One unit of a gold ETF usually means one fraction of a gram of gold whose value is linked to gold prices in the market. Gold ETFs, being listed products, are bought and sold through brokers at stock exchange timings in the exact manner various other listed stocks are traded.

Benefits of Gold ETFs

• Low expense ratio: As the majority of gold ETFs are passively managed funds, they come at an annual expense ratio of anywhere between 0.3% and 1%.
• Price movement in real time: You can get an indication of the movement in price right through the trading session and hence, will know the exact price of the purchase.
• Immediate liquidity: Sell the ETF at the time of the trading session, and there will be no delay due to the fund house.
• Better tracking of gold price: The fact that direct gold holding reduces slippage in comparison to an investment in the fund.
• No exit load: There is no exit load once listed, and you pay just your regular brokerage and transaction costs.

Risks & Limitations of Gold ETFs

• DEMAT account is compulsory: In case you don’t own a DEMAT account yet, you have to open and maintain it with the annual maintenance fees attached to it.
• Higher minimum investment: One unit usually equates to a gram of gold, making the minimum investment amount greater than that of a SIP in mutual funds.
• Native SIP: Unlike mutual funds, no native SIP exists due to the live market prices of the ETFs.
• Brokerage and bid-ask spread: There’s brokerage cost on every buy and sale, and in case of thin liquidity of the ETFs, bid and ask spreads become higher.

Also Read - https://blog.mysiponline.com/hni-sip-strategy-how-to-invest-1-lakh

Gold Mutual Fund Vs Gold ETF: Key Differences at a Glance

Returns And Cost Comparison

The intention behind both these investment vehicles is to mimic the performance of gold mutual funds as compared to the actual price of gold, but slight variations in costs can make a big difference over time.

• Expense ratio burden: The expense ratios for gold mutual funds are often higher due to the extra cost burden caused by ETF charges above and beyond the fund management costs.
• Tracking error becomes critical: A poorly performing tracking error is capable of underperforming the movements of the gold price by a significant degree annually, even prior to adding any fees.
• Historical returns look similar on the surface: In the long run, both have generated returns roughly equivalent to the increase in gold prices as both are designed with this objective.
• Exit loads shave off short-term gains: If you are an investor who may require withdrawing money from the fund within a few weeks of making your investment, then an exit load on a gold mutual fund will wipe out whatever gains you had made.
• ETFs edge out on pure cost efficiency: When it comes to cost optimisation for gaining gold exposure, the ETF route generally proves to be better.  

Taxation: Gold Mutual Funds Vs Gold ETFs (Post-Budget 2024 Rules)

Taxation was one of the areas that had remained somewhat complex in this comparison; however, Budget 2024 has simplified this quite a lot.

• Income tax on long-term capital gains arising from gold ETFs after a holding period of 12 months is taxed at 12.5% without indexation, whereas any short-term capital gain will be taxed as per your slab rate starting from April 1, 2025.
• The gold and silver exchange-traded funds (ETFs), together with equity and hybrid fund of funds as well as foreign schemes, once again become eligible for long-term capital gains tax treatment after being erroneously categorised as debt funds in March 2023.
• The new amendment was needed because the taxation on gold was done using your slab rate if the gold was held for less than three years and 20 per cent with indexation after three years, which was more of a penalty for long-term investors.
• The practical implication of this is that if you hold any of these instruments for more than one year, the LTCG rate will be a flat 12.5%, without having to calculate using the indexation tables.
• Tax efficiency is therefore not a differentiating factor anymore, as both the gold mutual fund and the gold ETF are taxed the same.

How to Invest in Gold Mutual Funds Vs Gold ETFs

The onboarding process looks quite different depending on which route you pick, and it's worth knowing both before you commit.

For Gold Mutual Funds:

• Open a mutual fund folio through MySIPOnline, an AMC website, or a registered distributor.
• Complete your KYC if you haven't already done it for any other mutual fund investment.
• Choose between a lump sum or SIP on MySIPOnline, and pick a monthly, weekly, or daily frequency.
• Track your investment through the fund's NAV, published once at the end of each trading day.

For Gold ETFs:

• Open a demat and trading account with a broker, if you don't already have one.
• Complete KYC and link your bank account for settlement.
• Search for the gold ETF ticker on the exchange and place a buy order during market hours.
• Monitor the live price movement and sell whenever you choose, the same way you'd trade a stock

Which One Should You Choose?

There's no single right answer here, the better fit depends entirely on your setup, habits, and what you're optimizing for.

Choose Gold Mutual Funds If...

• You don't have a demat account and don't want to open one just for gold exposure.
• You prefer disciplined, automated investing through SIP rather than manually timing purchases.
• You're new to gold investing and want the simplest possible entry point.
• You'd rather check your investment once a day than track live price movements.
• You're comfortable with a slightly higher expense ratio in exchange for convenience.

Choose Gold ETFs If...

• You already have a demat and trading account and are used to buying stocks.
• Lower costs matter more to you than the convenience of SIP.
• You want your investment to track gold prices as closely as possible.
• You want the flexibility to buy or sell instantly during market hours.
• You're comfortable monitoring live prices and placing your own buy or sell orders.

If you're still torn between the two, ask yourself one practical question: do you already have a demat account you use regularly? If yes, a gold ETF is the more cost-efficient pick. If no, a gold mutual fund SIP gets you started without any extra setup.

FAQs

1.Do I need a demat account to invest in Gold Mutual Funds or Gold ETFs?

You need a demat account only for Gold ETFs, since they trade on stock exchanges. Gold Mutual Funds don't require one, as you invest through a regular mutual fund folio instead.

2.What is the minimum investment amount for Gold ETFs and Gold Mutual Funds?

Gold Mutual Funds allow SIPs starting at ₹100 to ₹500. Gold ETFs require buying at least one unit, roughly equal to one gram of gold, which usually makes the minimum higher.

3.Can I invest in Gold ETFs through SIP like Gold Mutual Funds?

Most brokers don't offer a native SIP for Gold ETFs since they trade at live market prices. Gold Mutual Funds, on the other hand, support monthly, weekly, or daily SIPs by design.

4.Which is more liquid: Gold ETF or Gold Mutual Fund?

Gold ETFs are more liquid since you can buy or sell instantly during market hours on the exchange. Gold Mutual Fund redemptions route through the fund house and take one to two days.

5.Which is better for long-term investment: Gold ETF or Gold Mutual Fund?

Both work well long-term since taxation is now identical and returns track gold closely. Gold Mutual Funds suit disciplined SIP investors, while Gold ETFs suit those wanting lower costs and demat familiarity. 

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Disclaimer: This analysis is based on historical performance and market trends. Mutual fund investments are subject to market risks, and actual returns may vary. This content is for informational purposes only. Please read all scheme-related documents carefully before investing.