What is the difference between gold ETFs and gold mutual funds?

Gold has been the world’s favored investment for centuries now. To this day, staunch gold advocates would argue that real wealth originates from the yellow metal as against the fiat currency used as a medium of exchange in our economy. It is evident from the markets at large that gold has a negative correlation with the equity markets. More often than not, the sinking of the equity markets is often accompanied by a spike in gold prices, which explains why gold is mandatorily included in a lot of portfolios as a hedging asset.

Today, one can invest in gold in various ways including investing in gold ETFs, gold mutual funds and buying physical gold from the nearest retailer.

What is a gold ETF?

Holding gold in its physical form at home is fraught with risks. Contrasted with physical gold, owning gold in an ETF (exchange-traded fund) form is far more convenient. Gold ETFs are passively managed and reflect the current gold prices without distortions, unlike physical gold prices which vary across India depending on location and the demand-supply dynamic. What’s more, gold ETFs have fewer expenses than buying or selling physical gold. 

Gold ETFs are listed on the stock exchange and the only role that a fund manager plays in these schemes is to buy bullion gold and deposit it with the scheme’s custodian. These ETFs reflect the price of and give the same return as physical gold. The only difference between returns from ETFs and physical gold comes from the scheme’s expense ratio and tracking error. A lower tracking error means better returns for customers.

Investing in gold ETFs is quite ideal for individuals who are looking at gold from an investment point of view rather than using it for jewellery or personal use.

What is a gold mutual fund?

There are a few brokerage houses that allow investors to purchase gold ETF units at a regular interval. However, in these arrangements, the investors have to specify the number of units that can be purchased at the time of each transaction. This is highly inconvenient for a lot of investors. What is more, investors necessarily need demat accounts to buy gold ETFs.

To overcome this problem, fund houses started selling gold mutual funds. Gold mutual funds invest in schemes that purchase gold ETFs. Gold mutual funds track the value of the units of the gold ETF schemes which in turn reflect the value of physical gold. These mutual funds make money depending on the performance of the underlying asset. Changes in the NAV of gold ETFs units affect gold mutual fund returns.

Gold ETF vs gold fund:

1. Minimum investment:

The minimum amount of investment in a gold ETF will be the current rate of 1 gram of gold. For a gold mutual fund, it is Rs. 1,000.

2. Mode of investment:

Gold mutual funds invest in gold ETFs while gold ETFs invest in 99.5% purity gold.

3. Exit loads:

Gold ETFs have no exit loads while gold mutual funds charge an exit load when one redeems their holdings before one year.

4. SIP:

Gold mutual funds allow for SIP investments whereas the same is quite cumbersome in gold ETFs.

5. Demat accounts:

One doesn’t need a demat account to invest in gold mutual funds but a demat account is needed for gold ETFs.

Final word:

The difference between a gold ETF and a gold fund will help investors determine which investment vehicle best suits them.

Source: www.motilaloswal.com