From ancient times to the present day, gold has been a sign of prosperity. It’s more often thought of as a way to protect against inflation. Gold has long been regarded as one of the most efficient means of safeguarding one’s assets against unforeseen events. As opposed to equities, the price of gold has historically moved in the opposite direction, and it is a recommended commodity to protect against market risk, but only as a small part of the overall portfolio.
This occurs because gold is a slow-moving instrument that is usually more suited for a risk-averse investor who wants to beat inflation with good returns than fixed-income security. Physical gold, gold ETFs, gold mutual funds, and sovereign gold bonds are all options for investing in this precious metal. Investing in physical gold is ideally suited for ornamental purposes and has a reasonable storage expense. Gold ETFs and Gold Mutual Funds are very similar, but they do vary in certain ways. Sovereign gold bonds have an investment period of just 8 years, which puts them in a different category than the other two options. As a result, we’ll have to compare Gold ETFs and Gold Mutual Funds to see which one is better and why.
Gold ETFs are passive financial instruments that aim to track the price of gold. One gram of gold is equivalent to one Gold ETF unit, which is backed by physical gold of extremely high purity (99.5 per cent). Gold ETFs invest in either actual gold or stocks of gold mining and refining firms. A gold mutual fund, on the other hand, is structured as a fund of funds and invests mainly in gold ETFs as an underline asset. As a result, a portfolio of that ETF becomes the scheme’s underlying asset.
Gold ETFs can only be purchased in a dematerialized form, necessitating the use of a Demat account. Although it is possible to invest in a Gold Mutual Fund without having a Demat account, as a mutual fund scheme, it requires a minimum investment of Rs 500 or the sum specified in the scheme.
Gold funds, like any other mutual fund, allow investors to invest in a systematic investment plan (SIP), which allows them to benefit from rupee cost averaging by investing a predetermined sum at predetermined regular intervals. This method of investment is not available with Gold ETFs, but long-term investors may invest a smaller sum progressively at their leisure while the price is low to will their investment costs. Gold ETFs are a cost-effective investment choice because their expense ratio is very low. Brokerage and Demat account fees are examples of additional costs.
Being traded on the market Gold ETFs offer you the option of buying and selling at the current market price. The redemption sum would be equal to the exchange price multiplied by the number of units you put up for sale. In the case of a gold fund, when you place a redemption request, you will receive the sum based on the closing NAV on the day the redemption request is made, and you will receive it within the specified time frame.
After going over all of the major differences between gold mutual funds and gold ETFs, if you want to make a daily investment rather than a one-time investment, a gold fund is a safer and more lucrative choice with a higher cost. If you’re looking for a low-cost way to invest in precious metals, gold ETF is a good alternative.