Gold Mutual Funds Or Gold ETFs? Key Differences & Benefits Explained
Gold holds a significant position as an investment and is woven into the cultural fabric of India. However, with modern financial products like gold mutual funds and gold ETFs, today’s investors have options beyond physical gold. This guide explores each option’s unique features and the benefits, risks, and differences between gold mutual funds and gold ETFs to help you make informed choices.
What are Gold Mutual Funds?
Gold mutual funds are investment schemes primarily focused on gold. They allocate capital either to gold or gold-related assets, such as gold ETFs and securities of gold-related companies. These mutual funds are regulated by SEBI and often invest in companies involved in the mining and refining of gold, providing portfolio diversification and potentially higher returns compared to investing in physical gold alone.
Advantages of Gold Mutual Funds
- Low Investment Threshold: Investors can begin investing in gold mutual funds with as little as Rs 500, making it an accessible choice for those with limited funds.
- Liquidity and Flexibility: Gold mutual funds offer high liquidity. Units can be bought and sold during market hours, allowing investors to access funds quickly.
- Risk Mitigation: Since SEBI regulates gold mutual funds, investors benefit from a certain level of safety and oversight in their investments.
An Exchange Traded Fund (ETF) is a fund that tracks the performance of an underlying asset, such as gold. Gold ETFs invest directly in physical gold or gold futures, offering returns that closely align with the current gold prices. Because gold ETFs are traded on stock exchanges, they offer transparency and ease of trade, similar to shares.
Advantages of Gold ETFs
- Easy Trading: Listed on stock exchanges, gold ETFs can be easily traded. This ease of trading enhances liquidity, making ETFs a suitable option for those looking to trade frequently.
- Low Costs: Gold ETFs have minimal expenses since they typically exclude entry or exit fees, and investors avoid additional charges like VAT and Securities Transaction Tax (STT).
- Favourable Tax Structure: Although gold ETFs incur long-term capital gains tax, they are exempt from other taxes applicable to physical gold or jewellery.
Although both gold mutual funds and gold ETFs involve investments in gold, they differ in significant ways. Here’s a closer look at these distinctions
| Criteria | Gold Mutual Funds | Gold ETFs |
| Primary Investment | Gold ETFs, mining stocks, and gold-related securities | Direct investments in physical gold or futures |
| Demat Account | Not required | Required |
| Investment Mode | SIPs (Systematic Investment Plans) available | Lump-sum only |
| Cost Structure | May include entry and exit loads | No entry or exit loads but includes demat and brokerage charges |
| Tax Implications | Long-term capital gains tax and applicable jewellery taxes | Long-term capital gains tax, VAT and STT exempt |
Which Option is Better for You?
The choice between gold mutual funds and gold ETFs ultimately depends on your financial goals, risk tolerance, and convenience preference.
- For New Investors: Gold mutual funds may be easier to start with, as they do not require a demat account and offer SIP options, making them suitable for regular, small investments.
- For Frequent Traders: Gold ETFs are ideal for those comfortable with stock market trading. They offer lower costs and higher liquidity, which could be more appealing to active traders.
- Tax Considerations: Investors prioritising tax efficiency might prefer gold ETFs due to exemptions from VAT and STT.