Gold Mutual Fund vs Gold ETF: Which Should You Choose?

Gold has always been a favourite among Indian investors. Not only is the yellow metal considered auspicious and a sign of prosperity, but it is also a good hedge against inflation. In the past, people mostly bought physical gold – stuff like jewellery, coins, and bars. But things have changed now. These days, many investors are choosing easier and smarter ways to invest in gold. Options like digital gold, gold ETF, and Gold mutual funds are becoming more and more popular.

They allow you to own gold without having to worry about things like theft, storage, or the gold getting damaged. These new options are just as valuable as physical gold, but much more convenient. If you’re thinking of diversifying your portfolio by adding gold to your investments, but want to avoid the hassle of buying and keeping it at home, have a look at how gold ETFs and gold mutual funds can make things easier!

What are Gold Mutual Funds?

Gold mutual funds are a type of open ended mutual fund that invest in gold ETFs. They work like any other mutual fund. A gold mutual fund pools money from a large number of investors and the fund manager allocates assets to various gold-related securities, mainly gold ETFs. Individuals can invest in gold mutual funds via lump sum payments or through a Systematic Investment Plan (SIP) which allows them to make regular and consistent contributions towards their investment.

The performance of the fund depends on how well the physical gold market performs, and the investment is always made in 99.5% pure gold.

An important thing to note here is that a mutual fund investing in the stocks of mainly gold-related companies such as gold mining and gold refining companies is not considered a gold mutual fund. Rather, these mutual funds are called thematic funds, and their performance is tied to how well gold companies do rather than the price of gold.

What are Gold ETFs?

Exchange Traded Funds (ETFs) are passively managed investment vehicles that combine the features of stocks and mutual funds. Like mutual funds, they pool money from many investors to buy a collection of assets such as stocks, bonds, or commodities like physical gold. And like stocks, they can be traded on stock exchanges throughout the day. Gold ETFs invest in 99.5% pure gold, where 1 gram of gold generally represents 1 gold ETF. One has to buy at least one share to invest in gold ETFs, so the minimum cost to get started is much higher compared to gold mutual funds.

Key Differences between Gold Mutual Funds and Gold ETFs

Gold mutual funds and gold ETFs share some similarities, the biggest one being that both options give investors a way to invest in gold without the bother of physical ownership. However, when you compare gold ETF vs gold mutual fund, you’ll find that the two options are quite different. Here’s a quick look at what differentiates gold MF vs gold ETF:

Factor	Gold Mutual Funds	Gold ETFs
Tradability	Gold mutual fund units are purchased through the AMC at the prevailing NAV and cannot be traded on the stock exchange.	Can be traded on the stock exchange like any other ETF.
Minimum Investment Amount	SIPs allow individuals to invest in gold mutual funds with as low as Rs. 500.	A single gold ETF represents a gram of gold, which makes the minimum investment amount comparatively much higher.
Underlying Asset	Portfolio is made up of gold-related securities such as gold ETFs.	Physical gold is the underlying asset of gold ETFs.
Method of Holding	There’s no need for a Demat account to invest in gold mutual funds.	Since ETFs are traded like equities, a Demat account is required.
Liquidity	Gold mutual fund units can be processed and redeemed quickly. The value of your units depends on the NAV of the day. There’s no need to look for any buyers.	ETFs can be traded when the market is open. If there are buyers available, gold ETFs can be a highly liquid option.
Exit Load	There may be an exit load applicable if units are redeemed within one year or any other specified time period.	Exit load is not charged on gold ETFs.
SIP Option	Most AMCs offer SIPs for their gold mutual fund schemes.	No SIP option is available when investing in gold ETFs.
Costs	Generally, the costs associated with gold mutual funds are higher, somewhere between 0.6% and 1.2%.	Gold ETF costs range between 0.5% and 1%. The costs are slightly lower due to the lack of management fees.

Cost Comparison

The following costs are associated with gold ETFs:

• Brokerage Costs – For buying and selling units.
• Transaction Costs – Stock exchange transaction fees might apply.
• Demat Charges – Annual costs of maintaining the demat account should also be considered. This is comparatively a small consideration for investors already having a demat account and trading stocks.
• Expense Ratio – The expense ratio ranges between 0.5% and 1%, which is lower than that of gold mutual funds since they are passively managed.

And here are all the costs that are applicable to gold mutual funds:

• Expense Ratio – Due to management fees, the expense ratio of gold mutual funds is slightly higher. It generally lies somewhere between 0.6% to 1.2%. There are no brokerage or transaction costs involved with this option.
• Exit Load – An exit load can be charged by some gold mutual funds if the units are redeemed within a specific time period.

Ultimately, the cost difference between the two options isn’t very high. Gold ETFs can be considered a bit more cost-effective. So while costs should be a factor when considering which of these two to buy, they play a small role when compared to other factors such as affordability, flexibility, tradability, and convenience.

Features Gold ETF vs Gold Mutual Fund

Features of Gold Mutual Funds:

• Investment is not made directly in gold, but rather in gold-related securities like gold ETFs.
• Like all mutual funds, gold funds benefit from professional fund management. The manager makes sure that the portfolio stays aligned with market conditions and the fund’s goals.
• Gold mutual funds are highly accessible due to the availability of SIPs. Not every investor can make lump sum investments in gold, so SIPs allow them to make regular and fixed investments.
• Thanks to SIPs, the minimum investment amount needed to start investing in gold is much lower for gold funds compared to gold ETFs.
• One does not need a demat account to invest in gold funds.
• Investors can easily redeem their units based on the NAV of the fund.
• There’s no need to be involved in trading when investing in gold mutual funds.

Features of Gold ETFs:

• Gold ETFs can be traded on exchanges like stocks whenever the market is open.
• Each unit of gold ETF is backed by physical gold, so investors are directly exposed to gold prices.
• Gold ETF trading requires a Demat account.
• Compared to gold mutual funds, gold ETFs are more cost-effective.

Advantages & Disadvantages of Investing in Gold ETFs

Investors should be aware of the pros and cons that come with investing in gold ETFs:

Advantages of Gold ETFs:

• Gold ETFs are traded just like stocks. When there are buyers, these ETFs become a highly liquid option.
• The need for physical ownership of the metal is eliminated by ETFs. Buying physical gold can be a hassle. It can be damaged or stolen, and it also attracts storage costs. Gold ETFs remove such worries.
• They also offer a great way to diversify your overall portfolio. For example, when equity is performing poorly, gold often performs well because it is considered a safe-haven asset. Historically, gold has proven its ability to retain its value, so gold ETFs can add stability to a portfolio and reduce overall risk.
• Compared to gold mutual funds, gold ETFs offer a lower expense ratio.
• Gold ETFs are transparent as their prices reflect real-time gold rates.
• In some cases, gold ETFs can be converted into physical gold.

Disadvantages of Gold ETFs:

• The gold ETF market in India is not very big as of yet, so you may not be able to find liquidity when trying to buy or sell large quantities.
• One needs to have a Demat account to invest in gold ETFs. This is not necessarily a disadvantage for investors who regularly trade stocks, however, it can be an added concern for individuals who are not familiar with stock market investments. A Demat account also attracts a maintenance fee.
• Gold ETFs don’t offer SIPs, so the minimum investment amount required to start can be high.

Which is a Better Gold ETF or Gold Mutual Fund? 

Both options are similar in that they put an end to the concerns that come with physical ownership of gold. They are both good options for diversifying one’s portfolio, and they can also be easily converted into cash. In the end, the choice between gold MF vs gold ETF depends on your preference.

Investors Should Consider Gold Mutual Funds When:

• They want to make fixed and regular investments through SIPs.
• They are looking for gold exposure but are unable to make large lump sum investments.
• They prefer not to trade on the stock market.

Investors Should Consider Gold ETFs When:

• They prefer real-time trading with direct exposure to gold prices.
• They already have a demat account and are fine with trading on the stock market.
• They want to make large lump sum investments with lower expense ratios and fees.

One should also consider their financial goals and investment horizon when making a decision. For example, some gold mutual funds charge an exit load if the units are redeemed within a year of investing. In this case, Gold ETFs can be the more suitable choice as they don’t have exit loads and can be traded anytime on the stock exchange.

Conclusion

Both gold mutual funds and gold ETFs come with their own set of pros and cons and one cannot call one option better than the other. While these vehicles share some similarities, there are some significant differences between gold ETF vs gold mutual fund. Gold funds are more suitable for investors looking for the convenience of SIPs and gold ETFs for those who want a low-cost way to track gold prices with the flexibility of trading.
Another advantage of Gold ETFs is that they can be converted into physical gold, so if you want to own physical gold in the future, you can consider them. The festive season is almost upon us, and with it comes the tradition of buying gold. Both these options are great ways to add the stability and value of gold to your portfolio, but consider your financial goals, investment horizon, and risk tolerance before you make a decision.