Gold prices have hit record highs, rising nearly 60% in the past year alone. Investors are now flocking to the yellow metal. But what’s the right investment vehicle? Investors often compare gold mutual funds vs gold ETF (Exchange Traded Funds). Both options offer a convenient way to gain exposure without holding the metal itself. However, it’s important to understand the differences between a gold fund vs gold ETF to make the right choice based on your goals, costs, and tax implications.
Difference between Gold ETF and Gold Mutual Fund
A gold ETF is a fund that tracks domestic gold prices. A crucial difference between gold ETF vs physical gold is that ETF offer digital ownership backed by actual gold held in vaults, while physical gold requires storage, comes with making charges, and often carries concerns around purity and liquidity.
Gold ETFs also trade like shares on stock exchanges, meaning you can buy or sell them through your brokerage account. This also means you need a demat and a brokerage account to transact.
In contrast, gold mutual funds (including gold fund of funds) invest in gold ETFs. Also, you don’t need a demat or a brokerage account to invest in gold mutual funds. While both aim to mirror the gold price, there are some structural differences.
A comparison of gold fund vs. gold ETF performance shows that gold mutual funds are better suited to traditional investors who prefer systematic investment plans (SIPs). It’s because you can’t invest in gold ETFs through SIPs, but both allow lump-sum investments.
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Gold ETF vs Gold Mutual Fund Returns
When it comes to returns, both mirror the underlying gold price. The gold ETF vs the gold mutual fund returns difference is generally small, as mutual funds invest in ETFs. Before investing, it’s important to review a gold ETF’s tracking error, which indicates how accurately the fund tracks the movement of domestic gold prices.
Additionally, comparison of the gold ETF vs gold mutual fund expense ratio also becomes an essential factor. ETFs are typically the cheapest, while mutual funds have higher total expense ratios. The lower the charges, the higher the return will be, and vice versa.
Historically, gold funds and gold ETFs have performed similarly when tracking gold’s movements. However, ETFs are more tax-efficient and cost-effective for those who manage their investments themselves.
Gold ETF vs Gold Mutual Fund Taxation
Gold mutual funds and gold ETFs’ taxation rules are similar. Investments held for more than 12 months in gold ETFs and mutual funds are taxed at a long-term capital gains rate of 12.5% (without indexation). On the other hand, investments held for less than 12 months are considered short-term and taxed according to your income tax slab.
Which is Better: Gold ETF vs Gold Mutual Fund for Long-Term
Both are excellent, but choosing one depends on your investment style. If you already have a demat account, prefer low-cost options, and want to time the market, select gold ETFs. However, you’ll need to monitor gold prices to invest in a gold ETF, which makes it a bit more difficult.
But if you prefer to keep your investments simple, gold mutual funds are a better choice. They also allow you to invest through SIPs, helping you build exposure to gold in a disciplined way without worrying about short-term price movements.
The Bottom Line
Both gold ETF and gold mutual funds in India are preferred investment options, and both serve as efficient alternatives to holding physical gold. However, ETFs have an edge in cost and efficiency, while mutual funds offer simplicity and ease of investment. Before investing, always check the tracking error and the expense ratio of both. Ultimately, knowing how to invest in gold ETF and gold mutual fund helps you diversify your portfolio. For guidance, you can also consult a trusted mutual fund distributor in Delhi.
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Frequently Asked Questions
01. Are gold ETFs safer than physical gold?
Ans: Gold ETFs offer digital ownership backed by gold held in secure vaults. This removes concerns around purity, storage, and making charges that come with buying physical gold.
02. Can I invest in gold ETFs without a demat account?
Ans: No. A demat and trading account are required to buy or sell gold ETFs. If you want exposure without these, gold mutual funds are the better route.
03. Do gold ETFs and gold mutual funds generate different returns?
Ans: The difference is usually small. Gold mutual funds invest in ETFs, so both broadly mirror gold prices. The variation typically comes from expense ratios and tracking error.
04. Which is more tax-efficient: gold ETF or gold mutual fund?
Ans: Both follow the same tax rules. Holdings above 12 months attract long-term capital gains tax at 12.5% without indexation. Short-term gains are taxed as per your income slab.
05. Can I set up SIPs in gold ETFs?
Ans: No. SIPs are not available for ETFs. If you want to build your gold allocation gradually and with discipline, gold mutual funds allow SIP investments.
05. Which is better: Gold mutual fund vs Gold ETF Pros and Cons?
Ans: Gold Mutual Fund – Pros and Cons
Pros:
- No need to open a demat or trading account.
- Allows SIP investments for disciplined investing.
- It’s easy to buy, redeem, and manage online.
- This is ideal for new investors seeking simplicity.
Cons:
- Slightly higher expense ratio than gold ETFs.
- Returns depend on the underlying ETF performance.
Gold ETF – Pros and Cons
Pros:
- ETFs have the lowest expense ratios, making them cost-efficient.
- They are traded on stock exchanges with real-time pricing.
- Backed by physical gold stored in secure vaults.
- More tax-efficient for long-term investors.
Cons:
- It requires a demat and trading account.
- No SIP option available.
- Investors must track gold prices and market timing.
