Gold ETF vs gold mutual fund: Understanding the differences and finding a suitable fit

In modern financial markets Gold ETFs and gold mutual funds have emerged as avenues for investors wanting exposure to the precious metal without directly buying physical gold. However, choosing between them can be confusing if you don’t grasp their specifics.

This article looks at gold ETFs vs gold mutual funds by exploring what is gold ETF and looking at gold mutual fund meaning. This can help you identify the investment avenue that aligns with your goals and preferences.

• Table of contents

• What are Gold ETFs?
• Understanding gold mutual funds
• Gold ETF vs gold mutual fund
• Characteristics of gold mutual funds
• Characteristics of gold ETFs
• Overlapping aspects
• Advantages of going for gold
• Assessing which suits you

What are Gold ETFs?

A Gold ETF (exchange traded fund) invests in physical gold (or gold-linked derivatives) and is traded on the stock exchange. Essentially, each unit of a gold ETF corresponds to a set quantity of physical gold (commonly 1 gram). Since it trades like a stock, liquidity remains high – investors can buy or sell units at live market prices throughout the trading day.

The combination of trading flexibility with gold’s inherent underlying value can result in a cost-effective approach to investing in gold.

• Physical backing: Most gold ETFs hold physical bullion in secure vaults, so price fluctuations mirror gold’s spot market movements.
• Demat requirement: You need a demat and trading account to buy or sell Gold ETFs.
• Intraday trade: Since it’s exchange-traded, you can enter or exit positions at any time during market hours.

Read Also: What is an exchange-traded fund (ETF)?

Understanding gold mutual funds

Gold mutual fund meaning typically points to Fund of Funds that invest in gold ETFs. Some gold mutual funds simply hold units of a gold ETF, while others track a combination of gold-related equities plus some gold ETF positions. This means you don’t directly trade on a stock exchange for entry or exit.

• No demat necessity: You can invest in a gold mutual fund via an asset management company’s portal or an online aggregator, skipping the need for a demat account.
• NAV-based: Purchases or redemptions happen at the mutual fund’s daily NAV, not a live market price.
• SIP options: You can systematically invest (SIP) in gold funds, enabling rupee-cost averaging for gold exposure.

Gold ETF vs gold mutual fund

Some of the differences between gold ETF and gold mutual fund are:

• Trading mechanism: ETFs trade on an exchange; gold mutual funds use the daily NAV system with no intraday price discovery.
• Demat requirement: Gold ETFs require a demat account; gold mutual funds can be bought both with or without a demat account.
• Expense ratios: Typically, gold ETFs can have slightly lower expense ratios than gold Fund of Funds, though this varies by AMC.
• Liquidity: You can buy or sell ETF units throughout the day, while mutual fund transactions are processed based on the applicable NAV, which is calculated at the end of the trading day.

Characteristics of gold mutual funds

Some of the features of gold mutual funds are:

• Indirect gold exposure: By purchasing gold ETFs, these funds invest indirectly in gold.
• No storage hassle: As with other mutual funds, you don’t physically handle gold bars.
• Smaller investment thresholds: You can start with minimal sums, setting up an SIP if you prefer.
• Professional management: Fund managers handle rebalancing based on gold price changes or supply-demand patterns in the gold market.
• Daily NAV: The fund’s net asset value adjusts daily, factoring in the value of underlying holdings.

Characteristics of gold ETFs

• Direct investment: Invests directly in physical gold.
• Intraday trading: Trade units on a stock exchange at real-time quotes.
• Demat linkage: Must have a demat and trading account for transactions.
• Transparent pricing: Any buy-sell cost differences (bid-ask spreads) remain visible.
• Lower expense ratios: Since gold ETFs often track gold’s price straightforwardly, overhead can be smaller than a fully managed gold mutual fund.

Overlapping aspects

Despite structural differences, gold mutual funds and gold ETFs share similarities:

• Gold centric: Both revolve around gold’s performance, functioning as indirect means to hold or trade gold.
• No physical holding: Removes storage or insurance problems typical with physical gold.
• Market price influence: Both respond to global bullion prices influenced by factors like currency rates, central bank policies, or safe-haven demand.
• Diversification: Both can diversify an overall portfolio, possibly acting as a hedge during equity market downturns.

Advantages of going for gold

Advantages of gold ETFs revolve around real-time pricing, potential lower cost, and direct gold correlation.

Meanwhile, for gold mutual funds:

• Convenience: No demat needed, and you can invest systematically in small increments.
• Fund manager expertise: Some gold funds might complement ETF investments with other securities, potentially adding alpha beyond raw gold’s movements.
• Easy redeemability: Sell units at that day’s NAV, avoiding intraday price swings if you favour simpler transactions.

Read Also: Gold ETF vs Silver ETF: Key Differences and Where to Invest?

Assessing which suits you

• Demat vs. non-demat: If you already trade equities with a demat account, gold ETFs integrate seamlessly. If you do not want to open a demat account, a mutual fund might be simpler.
• Cost sensitivity: Gold ETFs commonly feature lower expense ratios, though you face brokerage and bid-ask spreads. Gold mutual funds might incorporate higher fees.
• Trading style: If you plan to trade frequently, real-time quotes from ETFs are beneficial. If you prefer monthly investments ignoring daily fluctuations, a gold mutual fund could suffice.

Conclusion

The question of gold ETF vs gold mutual fund is largely about your investment preferences –the former offers real-time trading flexibility while the latter can be purchased directly through the asset management company, without you needing to hold a demat account. If your priority is minimal overhead and direct price correlation, a gold ETF can be appealing. If you’d rather systematically invest smaller amounts or avoid demat complexities, a gold mutual fund might be suitable. Ultimately, each offers an alternative to physical gold ownership without the burden of storage or purity concerns. As part of a broader financial strategy, mixing gold instruments with traditional equity or mutual fund holdings can offer diversification benefits and mitigate the impact of volatility on your portfolio when markets experience turbulence.

FAQs:

Why choose an ETF over a mutual fund?

An ETF offers real-time trading opportunities, entails lower expense ratios, and offers direct price alignment with gold’s spot movements. Investors comfortable with demat accounts and intraday transactions might find ETFs more flexible.

Is buying a gold ETF a good idea?

Gold ETFs may be suitable if you seek exposure to the commodity without the hassle of storing and managing physical gold.

What are the risks of investing in gold ETF?

Risks include price volatility (gold can dip in the short term), currency fluctuations (if priced in global terms), and small bid-ask spreads when trading. Although more convenient and liquid than storing physical gold, it still mirrors gold’s market swings.

What is relatively stable, ETF or mutual fund?

Neither is inherently more stable than the other. A gold ETF can see quick price changes daily, while a gold mutual fund’s NAV adjusts once each day. Stability depends on gold’s overall price trajectory rather than the instrument’s structure alone.

Is a gold ETF a superior investment to a gold mutual fund?

Not necessarily. A gold ETF typically comes with lower expenses and real-time liquidity, making it appealing if you’re active in markets. A gold mutual fund, on the other hand, offers simplified investing (no demat needed) and possibly, the option to invest in SIP. Suitability hinges on your preferences, cost considerations, and how you prefer to hold gold assets within your portfolio.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
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