March 22, 2023

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Which Is Better: Gold Mutual Funds Or Gold ETFs?

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Gold Mutual Funds Or Gold ETFs
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One can buy gold or other precious metals as an asset by purchasing real gold or other precious metals or by investing in them digitally. Gold ETFs and Gold Mutual Funds are among the best gold investment alternatives accessible in India since they make purchasing gold easier, offer higher liquidity, and allow for the safer accumulation of gold. However, investors frequently mix up these two investments.

What is a Gold ETF?

The goal of gold ETFs, which are passively managed investment vehicles, is to invest in 99.5% pure gold.  ETFs are investment choices that combine stocks and mutual funds; they are maintained like mutual funds but can be exchanged like equities on the stock market. They attempt to mimic the returns of an index, in this case, a gold index. You require a Demat account to invest in a gold ETF.

What are Gold Mutual Funds?

Gold mutual funds are open-ended mutual fund plans that invest in gold ETFs. These funds are more practical because they are perfect for investors without Demat accounts. Because of this ease, the fund charges investors a higher cost of roughly 1.5% of its AUM (Assets Under Management), compared to the approximately 1% fee charged by gold ETFs.

Difference between Gold Mutual Funds & Gold ETFs

Transaction Costs: Gold ETFs have reduced management fees compared to gold mutual funds. Gold MFs that invest in Gold ETFs must also pay Gold ETF expenses.

Transferability: While gold MF remains on a Demat account, just like any other equities, the client can convert ETF to metal whenever necessary.

Investment Amount: 1 gram of gold at the current price is the required minimum investment in the Gold ETF. Rs 1000 is the minimum investment amount for gold mutual funds (as monthly SIP).

Taxation: The long-term capital gains tax rate for investments in gold made through mutual funds or exchange-traded funds is 20% plus a 4% cess. Direct taxation would not be applied to the profits of short-term (defined as less than 36-month) investors. Instead, their earnings are combined with their other income, and the appropriate tax slabs are applied.

Liquidity: ETFs, unlike gold funds, don’t have exit loads, allowing investment firms to purchase or sell the units whenever they choose during market hours. Units of Gold Funds sold to the fund house based on their NAV can be redeemed daily.

Which is a better investment option?

Mutual funds and exchange-traded funds (ETFs) for gold have several characteristics. Both are secure investment choices that spare investors from worrying about storage or theft when purchasing gold.

Diversifying one’s portfolio of investments is made easier by investing in these funds. Additionally, trading and withdrawals between the two funds are relatively simple. However, the investor’s financial goal and quantity of investment ultimately determine which option to choose.

Due to their investment in gold ETFs created by the AMCs, gold mutual funds do not require a Demat account. Additionally, it enables SIP investments, which are not available with gold ETFs. Additionally, gold funds must pay an exit load if they are redeemed before a year, whereas gold ETFs do not.

However, to purchase and sell units of gold ETFs, a Demat account is necessary. The fund holds physical gold equivalent to the value of the underlying asset. Additionally, stock exchange-traded securities provide investors with great liquidity. Investors also have the option of converting the ETF into actual gold.

When comparing the two funds’ differences, a gold fund is preferable if investors want to make frequent investments instead of one large investment. A lump sum investment in gold ETF is a cost-effective choice. As a result, the investor’s investing goal is wholly dependent on the convenience decision.

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