Gold ETFs vs Gold Mutual Funds: Which Investment Shines Brighter in the Current Market?

Gold occupies a prestigious place in the heart of every Indian investor; it has always maintained a position of stability in times of adversity. With growing interest in paper gold investments, Gold ETFs and Gold MFs have gained popularity. In a now-prospective market, which of these is the better option? Let's explore.

What is Gold ETF?

The Gold ETF closely tracked the gold price, with returns of Gold Mutual Funds being given by the returns of underlying Gold ETFs but slightly lower due to fund management expenses.

Features of Gold ETFs:

• Traded on stock exchanges like NSE and BSE.

• Requires a demat account.

• Tracks the market price of gold.

• Backed by physical gold stored in vaults.

• Lower expense ratios compared to mutual funds.

What is a Gold Mutual Fund?

Gold Mutual Funds (Gold MFs) are open-ended mutual fund schemes that invest in Gold ETFs or gold-related securities. Unlike Gold ETFs, they do not require a demat account.

Features of Gold Mutual Funds:

• Can be purchased directly from fund houses.

• Invests in Gold ETFs and other gold-related assets.

• Suitable for investors without a demat account.

• Slightly higher expense ratios than Gold ETFs.

• Available in Systematic Investment Plan (SIP) mode.

Key Differences Between Gold ETFs and Gold Mutual Funds

Returns Comparison: Gold ETF vs Gold Mutual Fund

The Gold ETF closely tracked the gold price, with returns of Gold Mutual Funds being given by the returns of underlying Gold ETFs, but slightly lower due to fund management expenses.

In the last one year, Gold ETFs have given returns of over 21.94% while Gold Mutual Funds gave returns of around 22.57% in six months according to an April, 2024 study.

Risk Comparison: Which Investment is Safer?

Both Gold ETFs and Gold Mutual Funds are relatively low-risk as they are backed by gold. However:

• Gold ETFs have lower expense ratios, making them more cost-efficient.

• Gold Mutual Funds may face additional risks from fund house management and expense drag.

• Market Risk: Both investments fluctuate based on gold prices.

• Liquidity Risk: Gold ETFs offer better liquidity as they trade on stock exchanges.

Tax Implications

Gold ETFs and Gold Mutual Funds have similar tax structures, with gains taxed under capital gains.

You might be interested in knowing how the Long-term Capital Gains (LTCG) tax works.

Which Investment Should You Choose?

Choose Gold ETFs if:

• You have a demat account and prefer direct exposure to gold.

• You want lower costs and better liquidity.

• You can monitor market prices and make real-time trades.

Choose Gold Mutual Funds If:

• You don’t have a demat account and prefer ease of investment.

• You want to invest via SIPs.

• You are comfortable with slightly higher expenses.

Best Gold ETF Funds in India

If you're looking to invest in Gold ETFs, here are some top-performing options:

• Nippon India ETF Gold BeES

• HDFC Gold ETF

• SBI Gold ETF

• ICICI Prudential Gold ETF

• Kotak Gold ETF

Conclusion

Gold ETFs and Gold mutual funds are great ways to invest in gold. If you want low cost, direct access to the markets, and liquidity, Gold ETFs are the best option for you. If you want to invest through an SIP, and the convenience of investment and do not have a demat account, Gold Mutual Funds are your best option.

Determine your financial goals, risk appetite, and investment horizon before any investment for the right choice!