Want to strike gold in your investment journey?
Now imagine that Gold ETFs are pop hits that are quick, accessible, and ideal if you want to ride the golden wave effortlessly. Whereas, Gold Mutual Funds is a well-crafted album that offers a diverse and rich collection of gold-related assets (music tracks) to instill a deeper experience.
How do you choose between an infectious hit song versus an enriching indie album? It depends on specific individual factors and the experience that you wish to gain. Similarly, the choice between Gold ETFs and Gold Mutual Funds depends on you.
In this blog, we’ll break down the key differences between the two investment options – Gold ETFs and Gold Mutual Funds – to help you choose the perfect tune to create your financial symphony!
Table of Contents
Gold Mutual Funds: How To Diversify and Strengthen Your Investments?
Gold Mutual Funds are like a well-curated music album where each track contributes to your listening experience. The album mixes different songs to create a cohesive meaning, just as Gold Mutual Funds allow you to invest in various gold-related assets.
This financial instrument allows investors to diversify the benefits of gold exposure without the concerns of purchasing and storing physical gold. Each fund is managed by a professional who selects the best assets, such as Gold ETFs and stocks of companies related to gold mining, to achieve the fund’s investment objectives. However, the value of a gold mutual fund unit depends on its net asset value which may fluctuate based on the underlying assets’ performance. This makes gold mutual funds an investors’ ideal hedging tool against inflation and market volatility.
Short-Term Capital Gain on Gold Mutual Fund
If the units were bought between April 1, 2023, and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates (irrespective of the holding period). If the units are purchased after March 31, 2025, and sold before two years, the gains will be added to the taxable income and taxed at applicable income tax slab rates.
Long-Term Gain on Gold Mutual Fund
If the units were purchased between April 1, 2023, and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates (irrespective of the holding period). If the units are purchased after March 31, 2025, and sold after two years, a 12.5 per cent tax on the gains will be payable without the indexation benefit.
How To Simply Invest in Gold Mutual Funds?
Ever seen how a music producer crafts an album that resonates with his audience? Each song’s performance on the music charts may vary, but the overall album aims to deliver a balanced experience. This is the strategy Gold Mutual Funds use to navigate the gold market.
To invest in Gold Mutual Funds, you may start with smaller amounts while also allowing SIP investment plans to regular contributions. You don’t require a Demat account, thus, you are not required to interact with the stock market directly. Rather, your fund manager manages your investments, tries to mirror the returns generated by gold, and diversifies risk across several assets.
What Are Gold ETFs? – Make Investments in Gold More Accessible!
In similar musical terms, Gold ETFs are popular streaming service such as Spotify that allows you to download and enjoy your favorite songs without the need to possess physical albums. Just as these streaming platforms offer you direct access to a diverse music library, Gold ETFs provide investors with easy access to gold investments that enable tracking the physical gold prices without any concern about its security.
Gold ETFs or Gold Exchange Traded Funds are financial instruments regulated by the Securities and Exchange Board of India (SEBI). Gold ETFs are traded on the Bombay Stock Exchange Ltd. and the National Stock Exchange of India (NSE). And, can be purchased through stockbrokers or on e-trading platforms at market prices.
Consequently, they are exchangeable funds that invest in gold bullion and are based on domestic gold prices. The fund units represent high-purity physical gold, over 99.5% pure, in paper or dematerialized form. Remember that 1 Gold ETF equals 1 gram of gold, exactly how a song added to a playlist signifies one single track.
Taxation of Gold ETF
Short Term
If the units were purchased between April 1, 2023 and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates (irrespective of the holding period). If the units are bought after March 31, 2025, and sold before 12 months, the gains will be added to the taxable income and taxed at the applicable income tax slab rates
Long Term
If the units were bought between April 1, 2023 and March 31, 2025, The entire amount of gain will be added to the taxable income and taxed at the applicable slab rates (irrespective of holding period). If the units are purchased after March 31, 2025 and sold after 12 months, a 12.5 per cent tax will be payable on the gains without the indexation benefits.
How Do Gold ETFs Ensure the Purity of the Gold?
Backed by 99.5% pure gold bullion, Gold ETFs’ high-purity level is guaranteed by fund managers who source gold from RBI-approved banks. The physical gold is then stored in secure vaults by custodians eliminating the risks and additional expenses associated with investors who store physical gold themselves. There is no physical ownership required.
Besides, Gold ETFs are also audited regularly to match the outstanding ETF units through stock exchange websites to maintain transparency. Investors merely trade and track the ETF units while the fund managers secure the logistics.
Their flexibility, cost-efficiency, transparency, and simplicity make Gold ETFs more accessible to you. When you buy Gold ETFs, you purchase electronic gold. These are traded on stock exchanges – how you can stream or add a song to your playlist. It takes place through a Demat account as well as a broker. Finally, when you wish to redeem a Gold ETF, you don’t receive physical gold but cash equivalent to the number of ETF shares sold at the market price.
Factors that Influence an Investor’s Decision: Significant Differences Between Gold Mutual Funds & Gold ETFs
The comparison between Gold Mutual Funds and Gold ETFs is fundamental for our knowledge. Gold has always been a haven for investors due to its positive performance in times of uncertainty. How do you choose which investment option works ideally for you?
To help you form an opinion, let’s discuss the basic differences between investing in Gold Mutual Funds and Gold ETFs.
1. Liquidity: Gold mutual funds can be purchased and sold quickly to the fund house, increasing their liquidity whereas the liquidity of Gold ETFs depends on market movements and requires sufficient buyers on the stock exchange.
2. Holding Mode: Gold ETFs can be traded through brokers or have the shares held through Demat accounts. However, investing in gold mutual funds doesn’t require any such obligations making them accessible to retail investors.
4. Cost of Transaction: The expense ratio for gold mutual funds falls between 0.6-1.2% annually. While the annual cost of Gold ETFs is between 0.5-1%, including ETF and management fees, along with this the transaction cost is payable to the broker while buying and selling ETFs.
6. Exit Load: Gold ETFs don’t entail any exit loads however Gold Funds have an exit load as approximately 1% if the investor withdraws before a stipulated period.
Gold ETFs vs. Gold Mutual Funds: When Should You Choose One Option Over the Other?
You may choose a Gold ETF over a Gold mutual fund to avail low management expense ratio, lower operating costs, high tax efficiency, and additional facilities for intra-day trading. This enables investors to sell and purchase their shares in real-time market prices with higher transparency, visibility, and accessibility to diverse portfolios. Gold ETFs also offer greater flexibility in trading options and size, and don’t concern themselves with insurance or security costs, unlike physical gold.
On the other hand, Gold Mutual Funds have increased accessibility and low minimum investment. You can make small and regular contributions to stay disciplined. The affordability of gold mutual funds broadens its audience enabling them to invest in several gold-related assets. It is a relatively better approach to mitigate risks, manage volatility, and increase exposure to different assets. Moreover, gold mutual funds are more accessible as they don’t require a Demat account, making investment easier for beginners.
Concluding Points!
While both the financial options in the gold sector have their advantages, they also have certain drawbacks. Gold ETFs don’t generate dividends, there is indirect ownership, may involve premium costs of gold, and have limited management control. On the other hand, Gold mutual funds include additional costs associated with fund activities,, and added exit loads.
The final choice between the two depends on the investor – you! Outline your investment goals, preferred management style, and risk tolerance capabilities. If you seek diversified portfolios, low-risk opportunities, higher cost efficiency, access to the real-time price of funds, and flexibility, Gold ETFs are your haven. But, if you seek inflation hedge, convenience, SIPs, and diversified exposure, Gold Mutual Funds is your ideal option.
Understand each option. Focus on investment horizons, and preferences and consider the costs. Lastly, gain in-depth knowledge to make informed financial decisions on enhancing your investment portfolio.
Please share your thoughts on this post by leaving a reply in the comments section.
Also, check out our recent post on: “Role of the SEBI (Securities Exchange Board of India) for Investors“
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
