- Gold ETFs and gold mutual funds are the capital market instruments that will invest in gold and other related securities.
- Earlier, people used to invest in physical gold, but now there are many options to invest in this yellow metal in paperless form.
What are gold ETFs?
- Gold exchange-traded funds (ETFs) are financial instruments that are basically designed to track the price of gold.
- They are listed and traded on the stock exchanges just like the shares of all the individual companies.
- In India, gold ETFs are regulated by the Securities and Exchange Board of India (SEBI), and they can be purchased through a stockbroker or any online trading platform.
- When you are investing in the gold ETF, you are buying the units of gold that represent the ownership of physical gold that is held in the vault by the custodian of the fund.
- The value of these units is directly linked to the prices of gold and also fluctuates in line with the changes in the market.
- The best advantage to investing in this gold is that you can invest in this precious metal without the need to physically store it.
- You can even buy and sell gold ETFs in small quantities in the open gold market.
The Key Features of Gold ETFs
Tracking the price of gold
- Gold ETFs are designed to track the price of gold so that they can be highly correlated with the price of the metal.
- So if the price of gold rises or falls, the value of the ETF will also move accordingly.
Liquidity
- ETFs are highly liquid, meaning that they can be bought and sold easily in the market.
- This is the most popular choice for investors who want exposure to gold but can’t deal with the costs of buying and selling physical gold.
Easy to trade
- All the gold ETFs are traded on the stock exchange like stocks of the company, which makes them very easy to buy and sell.
- They can also be bought and sold like normal stocks and traded throughout the day.
Diversification
- Investing in a gold ETF can provide diversification for the investment portfolio.
- By holding this gold ETF, investors are indirectly investing in a variety of gold assets, such as gold mining companies and gold futures contracts.
Low costs
- These ETFs have low expenses compared to other types of gold investments.
- The expense of the gold ETF is very low, making it the most attractive option for investors who wish to have exposure to gold.
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Who should invest in gold ETFs?
The following are the types of investors who can invest in ETFs:
- Investors planning to diversify their portfolio by including an asset that has a low cost correlation with the stock market can consider this option.
- This option has an inverse relationship with the stock market, meaning that when the stock market is down, the gold market rate will be high.
- Risk-averse investors who want a safe investment option can consider this option because the risk involved in investing in gold is comparatively less than in investments in the stock market.
- ETFs can also be considered a good choice for long-term investors who want to hold their investments for a long period of time because the value of gold will increase with every passing day.
- Gold is considered an inflation hedge because its value will increase during times of inflation, and investors who are worried about inflation can invest in ETFs to protect their portfolio.
What are gold mutual funds?
Gold mutual funds are mutual funds that invest in various forms of gold.
It could be anything, such as:
These funds are managed by professional fund managers who wish to invest on behalf of the investors.
Key features of gold mutual funds
Investment in Gold
Gold funds will invest primarily in physical gold or in securities of the company that is engaged in gold-related activities such as mining, trading, and refining.
Convenience
These funds can be bought and sold through online trading platforms or through a broker, which makes it a convenient way to invest in gold with hassle-free storage options and other security risks.
Diversification
Gold funds will offer diverse benefits as they will provide exposure to the gold market without owning physical gold, reducing the risk of your portfolio.
Transparency
These funds provide transparency as the net asset value (NAV) of the fund is calculated daily, so investors can track the performance of the fund through various financial websites as well as the official website of the fund.
Liquidity
These funds tend to be highly liquid, as they can be bought and sold on the stock exchange like other mutual funds.
Tax Efficiency
These funds are subject to a long-term capital gain tax of 20% with indexation benefits, which is the most tax-efficient way to invest in gold.
Low Cost
Gold funds have lower management fees, which makes them the most cost-effective way to invest in gold metal.
Who should invest in gold mutual funds?
Investors who wish to diversify their portfolio and hedge against inflation can consider this option.
However, gold funds are volatile, and the value of these investments is affected by various factors, such as:
Difference between gold ETFs and gold mutual funds
The main differences between gold ETFs and gold mutual funds are as follows:
| Parameters | Gold ETFs | Gold mutual funds |
| Exit load | No loads | Loads are charges if units are redeemed within 1 year of unit allotment |
| Demat account | No need of any Demat account | No need for any Demat account |
| Trading | Can be traded on any stock exchange | No such trading options are available |
| Minimum investment amount | 1 gram of gold subject to the current market price | Rs. 1000 |
| Flexibility | More flexible to manage the holding | Less flexible |
| Liquidity | Highly liquid | Less liquid |
| Structure | Exchange traded funds that can track the price of gold | Mutual funds that will invest in gold |
Conclusion:
The decision to invest in an ETF or mutual fund is in your hands.
Frequently Asked Questions (FAQs)
Q1. What is a gold ETF?
They are the financial instruments that are designed to track the price of gold.
Q2. What is a gold mutual fund?
It refers to the mutual funds that will invest in various forms of gold.
Q3. Where are gold ETFs and gold mutual funds traded?
Gold ETFs are traded on stock exchanges, whereas gold mutual funds are traded like mutual funds.
Q4. Which is better: a gold ETF or a gold mutual fund?
The choice is in the hands of the investor’s individual investment objectives and risk tolerance.
Q5. Why is gold ETF lower than the gold price?
The value of the gold ETF is based on the demand and supply of the ETF on the stock exchange.
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