Gold Mutual Funds VS Gold ETFs: Which One Should You Choose?

For investors looking to invest in gold without the hassle of buying and storing physical gold, gold mutual funds and gold exchange-traded funds (ETFs) are two popular options. While both offer a convenient and secure way to benefit from gold's long-term value, they operate quite differently and choosing the right one depends on your financial goals and preferences.

Why Not Physical Gold?

Buying and storing physical gold comes with challenges. It requires secure storage, involves purity concerns, and selling it later can be a hassle. Sovereign Gold Bonds (SGBs), while secure, have a five-year lock-in period, making them less flexible for those seeking quicker liquidity.

This leads many investors to consider gold ETFs and gold mutual funds, both digital options with their own advantages.

Gold ETFs vs Gold Mutual Funds: What's the Difference?

Though both are linked to the price of gold, gold mutual funds and gold ETFs are structured differently.
Gold ETFs are traded on stock exchanges like shares and allow real-time buying and selling during market hours. You need a demat and trading account to invest, and the minimum investment is equal to one unit, roughly one gram of gold.

Gold Mutual Funds, on the other hand, invest in gold ETFs. They do not require a demat account and can be purchased online or through an agent. You can start investing with as little as ₹500 via a Systematic Investment Plan (SIP), but purchases and redemptions happen at the end-of-day Net Asset Value (NAV), not instantly like ETFs.

Key Benefits

Gold ETFs

Gold ETFs offer the advantage of real-time trading during market hours, allowing investors to buy or sell units just like stocks. They come with low costs and no exit load, making them a cost-effective option.

Additionally, gold ETFs are known for their transparency and tax efficiency, which appeals to many investors. These features make gold ETFs particularly suitable for experienced or frequent traders who are comfortable navigating the stock market.

Gold Mutual Funds

Gold mutual funds are easy to start and do not require a demat account, making them accessible for a wide range of investors. They are ideal for beginners and those who prefer investing through SIPs, allowing for regular, small investments.

These funds offer flexibility for long-term investment goals, making them suitable for investors with a systematic approach. However, they tend to have a higher expense ratio compared to gold ETFs, as they are actively managed by fund managers.

"While Gold ETFs are ideal for those with a Demat account or those looking to potentially convert physical gold, Gold Mutual Funds suit investors seeking systematic, long-term investment flexibility. Your choice depends on your investment goals and what suits your fund requirements," said Pankaj Mathpal, MD and CEO of Optima Money Managers.

Which One Should You Choose?

"Choose gold mutual funds if you are new to investing, want to start with small regular investments through SIPs, and don't have a demat account. On the other hand, gold ETFs are a better choice if you already have a demat account, want the ability to trade during market hours, and prefer lower costs with more control over when to buy and sell," explained Pankaj Mathpal of Optima Money Managers.

Tax Implications

"Gold ETFs are considered more tax-friendly. They attract long-term capital gains (LTCG) tax after 3 years, but you avoid taxes like VAT and Securities Transaction Tax (STT) that may apply to physical gold. Gold mutual funds also attract LTCG tax but may include additional fund management charges," said Mehul Ashar, CEO of Sky Financials.

Performance and Cost

• Rolling Returns: Gold ETFs often deliver returns closely aligned with actual gold prices. Gold mutual funds may vary slightly due to active management.
• Cost: Gold mutual funds are slightly more expensive due to layered management fees.
• Risk (Drawdown): ETFs generally have lower drawdowns, making them slightly more stable in volatile markets.

"If you're looking for a low-cost, flexible, and liquid way to invest in gold and you're comfortable using a trading platform, Gold ETFs are a smart option. However, if you prefer a hands-off approach with the ability to invest small amounts regularly, Gold Mutual Funds may suit you better," said Pankaj Mathpal, MD and CEO of Optima Money Managers.

No matter which route you choose, financial planners recommend allocating 10-15% of your portfolio to gold as a hedge against inflation and market volatility.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, investment, or credit advice. The views and recommendations mentioned are based on publicly available data and expert opinions at the time of writing. Neither the author nor GoodReturns endorses any specific product or financial decision. GoodReturns.in and its affiliates are not responsible for any loss or damage resulting from reliance on the information presented.