With the market being so volatile and uncertain, investors are looking to add stability to their portfolios. One way of doing that is investing in gold. Investing in physical gold is cumbersome and entails a number of problems. But today, investors are faced with two choices when it comes to investing in the yellow metal. They can choose whether to invest in Gold ETFs or Gold mutual funds. Before an investor makes a decision, it is important to understand what the difference between the two is. Even though both are mutual fund products but have different modes of purchase. Eventually even gold mutual funds go and invest in Gold ETFs. Historically rate of return is higher in Gold ETFs rather than in Gold mutual funds.
What is Gold ETF? ETF stands for exchanged traded fund which is an investment fund traded on the stock exchange. Gold ETF uses money pooled together by a number of individuals, and it places it in a group of stocks that own and hold gold. So even though you are investing in gold but you do not hold any physical gold.
What is Gold mutual fund? A gold mutual fund is like any other mutual fund and is managed by a fund manager. He invests in small gold mining businesses to reap profits. The fund consists of an assortment of stocks and thus he can take advantage of daily fluctuations.
Gold ETF and Gold mutual funds can be compared on various planes.
- How can you invest in gold ETF or gold mutual fund? An investor needs to have a demat account to purchase a gold ETF. But with more and more people becoming Internet savvy and doing online trading, this is no longer a deterrent in investing in ETFs. To invest in a gold mutual fund you do not require a demat account.
- Benefits of rupee cost averaging. The option of Systematic investment planning is not available with an ETF. However you can average your cost by buying larger quantities when price falls and vice-versa. Also an investor can make use of intra-day fluctuations in the market. In mutual funds, the investor can invest systematically and gain benefits of averaging.
- Ease of selling or liquidity. Since the ETFs are listed on the stock exchange, an investor can buy and sell it as he pleases. If he decides to sell it he can get his money back in a couple of trading days. Of course he has to pay transaction and brokerage charges. Therefore an ETF can take advantage of volatile gold prices. But in the case of a mutual fund, if you do decide to exit from the mutual fund the amount of money you receive will depend on the recent closing NAV. So you cannot take advantage of volatility in the market. Also if you exit earlier than stipulated , you will have to pay an exit charge.
- Other costs involved. In case of an ETF, the investor has to bear charges of opening a demat account and paying transaction fees and brokerage every time he decides to sell or buy in the market. In a mutual fund you do not incur such costs, but only have to bear an exit cost which could be as high as 1%. Besides this since the ETF is not actively managed, there are no fund management charges applicable as against a mutual fund which needs to be actively managed to take advantage of changes in the market.
I will summarise the above points below for ease of understanding.
| Parameter | Gold ETF | Gold mutual fund |
| Rate of return | √ | √ |
| Need of Demat account | √ | |
| Benefits of SIP | √ | |
| Liquidity | √ | |
| Brokerage, transaction costs | √ | |
| Exit charges | √ | |
| Ease of availability | √ | √ |
Conclusion
Gold is considered as an important component to safeguard your portfolio during bad economic conditions. In summary, both Gold ETFs and mutual funds have its pros and cons. It depends on the investor’s needs and reasons for investing in Gold. Generally speaking ETFs are more suited for active investors who like to trade intra-day. But people who do not want to be so involved and like to invest for long term should look at investing in mutual funds.
– This article is written by Mayank Gupta, Founder at NineMillionDollars.com where you can find articles on personal finance and tax saving.
Gold Bullion Exchange traded fund is directly tied to the gold price. When you invest in this Exchange traded fund, the manager uses those funds to buy gold bullions. These bullions are then stored in a vault.
which gold fund is good to invest kindly suggest some. Reliance gold saving fund is good to invest. kindly reply soon.
@Dheeraj
There is not much difference among gold mutual funds as they all invest in same physical gold.
You can invest into Reliance gold saving fund if you want to pick a gold mutual fund.
I have used your income tax calculator 2011-12 but most of the things I do not understand. But I have calculated my income tax in a simple way as my monthly salary is Rs25000/- and annual salary is Rs300000/- the basic exemption for men is Rs180000/ so the gross income will be Rs120000/- and as per rule I can maximum invest Rs100000/- so the taxable income on which I have to pay tax will Rs20000/- and if I invest Rs20000/- in infrastructure bond then my whole tax will be saved. So Mr. Pankaj kindly analyse these calculation and reply with your suggestions soon.
@Dheeraj
If you have salary components like LTA, HRA, Conveyance allowance and medical reimbursements etc., then not whole of your monthly salary might be taxable.
If its not the case and you get just a fixed salary without any components, then your calculations are correct.
Investments through SIP for ETF is now available. Period may be 1 day, 1 week, 1 month. The only difference is that rather than fixed amount every month (or every period), you have to buy fixed unit(s) in ETF for which the amount may change month-on-month (or period-by-period).
@Manish
This is not a standard feature and only available with some of the online trading brokers only like ICICI securities or HDFC.
Mr Batra glad for your suggestion. My salary breakup is like this Basic salary=13000, HRA=6000, Medical Allow= 3000, CCA=1000, Conveyance=2000 Total Monthly Salary is Rs25000/- I live in my father’s house and I get all allowances in a single salary I do not get separate allowances like hra to pay house rent. So, tell me now my tax calculation is correct. Moreover, I want that you plan tax saving investments for me so that I can follow and save tax. I just want to take your suggestion for example. After getting your suggestion I will think over it and change as per my mind. So, don’t hesitate to give suggested planning and do reply fast.
@Dheeraj
Please download income tax calculator from this page: http://www.pankajbatra.com/india/income-tax-calculator-india-2010-2011-2012/
This will help you compute income tax and tax saving requirements.
For tax saving suggestions, read following pages:
http://www.socialfinance.in/questions/7/tax-saving
http://www.socialfinance.in/questions/45/investment-advise
I want to understand the tax liability for Car allowance. For an employee owned Car, the Company can reimburse fuel, maintenance, Chauffeur’s Salary expenses subject to the production of proof of the amount spent.
1) Is this amount 100% tax free
2) What does below line means “For a car of cubic capacity below 1.6 liters tax exemption is provided at Rs.1,800 per month for running/maintenance. An additional of Rs.900 is exempted from tax for chauffer salary.”
Is only 1800+900 tax free.
@Amar
Whole reimburse amount is not tax free. Only up to Rs 1800 (and 2400 in case of car with more than 1600cc engine) per month is non taxable for car maintenance and fuel expenses. Rs 900 per month is non taxable for driver allowance.
So only 1800+900 would be non-taxable maximum in case of a car less than 1600cc engine.
Hi Pankaj, Thanks for your prompt reply.
I am bit confused, my company has a car reimbursement and Driver salary component as part of the salary structure, which is very high amount than 1800 + 900 (it is around 7 times more). Why would they allow me to claim more than 1800+900, if anything above that is taxable. Also, I have used your tax calculator FY 2012-13, as per this entire amount for Car Reimbursement and Driver Salary falls under “Non – Taxable Allowances”. Can you please help me understand this.
@Amar
As of now this is the only acceptable deduction on employee owned car used for commuting to work.
Reimbursement for some other employees like Sales people may be done higher as travelling is part of their work. In Income tax calculator, no limit has been put on deduction, but user can put limits himself in cell C54 and cell 56.
What would be better from an investment POV, buying a Gold ETF or buying E-Gold (where you can convert it into physical gold when you want) or or a Gold Mutual Fund
@Nitin
Gold ETF would be better option because of low additional charges levied.
Thanks for the reply, Pankaj. Whats your opinion/ view about E-GOLD?
@Nitin
E-Gold is also good. But investment is complicated. You need to open a separate account for this.
Most of the online brokerage companies and demat does not support investment in e-gold.
Dear Pankaj,
Can you give your opinion onIDBI Gold Fund? Are there any bettr schemes?
Regards
Kalpathy
@Kalpathy
IDBI Gold fund is a mutual fund. If you have a demat account, you can better invest via Gold ETFs.
Dear Pankaj,
Thank you for your quick response. Your site is very very useful for me.
Regards