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||√|
|Brokerage, transaction costs||√|
|Ease of availability||√||√|
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.