Gold Mutual Funds Versus Gold ETFs (Exchange Trade Fund)

Gold Mutual Funds Vs Gold ETFs

Investments in gold have since long been the most preferred investment methods by Indians as it has a demonstrated ability to act as a hedge against inflation. It also offers stability during a crisis, be it political, financial, or economic. From being used since the time of barter trade to using it for making jewellery, and now paper gold, the universal appeal of gold seems to be intact. Gold can also act as a diversifier for an investor’s investment portfolio. When other asset classes fail to deliver satisfactory returns, the returns offered by gold can balance the portfolio.

However, investing in physical or metal gold comes with a drawback. Storing the precious metal can be risky as there are chances of it getting stolen. Hence, unless you need the metal gold to make ornaments for an event such as a wedding in the family, it is better to invest in gold in a dematerialised form. Among the best ways to invest in gold in a dematerialised form, gold mutual funds and gold ETFs fare the best. Before we give you the benefits of investing in gold through gold mutual funds and gold ETFs, let us first understand what these forms of investment are.

What are gold ETFs?

Open-ended mutual fund schemes that make investments in physical gold of 99.5% purity are known as gold Exchange Traded Funds (ETFs). Around 90% to 100% of its corpus is invested in physical gold by gold ETFs and this gold is sourced from banks approved by the Reserve Bank of India (RBI). Gold ETFs also invest a minor portion (0 to 10%) of its corpus in debt securities. Since gold ETFs invest in physical gold, the returns offered by them are almost similar to the returns offered by physical gold.

When investing in gold ETF, the minimum units that investors can buy is 1 unit of gold which is equal to 1 gram of physical gold. Since the units of gold ETFs are tradable in the stock exchanges, they are able to offer liquidity to buyers as well as the sellers of these units. This is also the reason why gold ETFs can offer the right price to buyers and sellers alike. Please note that the liquidity offered by gold ETFs can vary from AMC (Asset Management Company) to AMC. Also, to invest in a gold ETF, having a demat account is a must.

What are gold mutual funds?

Open-ended mutual fund schemes that invest in gold ETFs are known as gold mutual funds. These funds are ideal for investors who do not hold a demat account and hence, are more convenient. Hence, for this convenience, the fund charges a slightly higher fee to investors which is around 1.5% of the fund’s AUM (Assets Under Management) whereas gold ETFs only charge around 1%.

Comparative Analysis: Gold mutual funds vs gold ETFs

Gold ETFs Gold Mutual Funds
Invests in pure gold of 99.5% purity Invests in gold ETFs
Investors need a demat account to subscribe to the units of gold ETFs No demat account is needed to invest in gold mutual funds
No SIP (Systematic Investment Plan) route allowed for investment SIP route of investment can be taken for investing in gold mutual funds
Offer higher liquidity Less liquid as compared to gold ETFs
Gold ETFs can be converted to physical gold No such facility available in case of gold mutual funds
Gold ETFs charge no exit loads Gold mutual funds charge an exit load if units are redeemed before 1 year from unit allotment date
The minimum investment in gold ETFs is 1 gram of gold which is around Rs.3,000 Investments in gold mutual funds can be done for an amount as less as Rs.1,000
Units of gold ETFs can be traded on the stock exchange No such option available
Offers greater flexibility in terms of managing the holdings Less flexibility in terms of fund management
Since units of gold ETFs are tradable at investor’s will, it can help tackle the market volatility No such facility available

Benefits of investing in gold ETFs and gold mutual funds

  • Both gold ETFs and gold mutual funds are safe investment options where one does not need to worry about theft or storage as in the case of physical gold.
  • Since gold rates do not undergo fluctuation frequently, investments in gold ETFs and gold mutual funds can help diversify the investment portfolio.
  • Similar as in pledging the metal gold as collateral while securing loans from banks or financial institutions, gold ETFs can also be used as security collateral.
  • Gold ETFs and gold mutual funds are tax-efficient as they do not attract any securities transaction tax (STT) or wealth tax.
  • Trading in gold ETFs is easy and the same applies to gold mutual funds which are professionally managed by fund managers.

Best Gold ETFs (based on past returns)

Based on the data recorded in 18 January 2019, the best gold ETFs are as follows:

Name of the Scheme 6-month Returns (%) 1-year Returns (%)
Canara Robeco Gold ETF 7.97 7.51
IDBI Gold ETF 8.42 7.28
UTI Gold ETF 8.39 6.96
Axis Gold ETF 8.04 6.86
Kotak Gold ETF 8.24 6.78

Best Gold Mutual Funds

As on 18 January 2019, the top-performing gold mutual funds have been listed below:

Name of the Scheme 1-year Returns (%) 3-year Returns (%)
Aditya Birla Sun Life Gold Fund - Growth 6.8 6.4
SBI Gold Fund – Growth 6.6 5.8
Reliance Gold Savings Fund 6.1 5.7
Kotak Gold Fund 7.6 6.1
HDFC Gold Fund 7.2 5.9

GST rate of 18% applicable for all financial services effective July 1, 2017.

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