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Investor's Gold Rush - Unveiling the Truth Behind Gold ETFs and Gold Mutual Funds

  • Nov 03, 2023
  • 12:52 pm
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Introduction

Gold investments have always been a popular choice for investors looking to diversify their portfolios and protect their wealth. 
Traditionally, physical gold in coins, bars, or jewellery was the primary way to invest this precious metal.  

However, with advancements in financial markets, there are now more convenient and accessible options available, such as Gold ETFs (Exchange-Traded Funds) and Gold Mutual Funds.

In this comprehensive blog, we will delve into the world of Gold ETFs and Gold Mutual Funds, exploring their differences and helping you make an informed decision about where to invest your money.
  
What are Gold ETFs?
Gold ETFs (Exchange-Traded Funds) are an investment vehicle that allows you to invest in gold without physically owning the metal. Instead, you buy units of Gold ETFs representing a certain amount of gold. These units are listed and traded on stock exchanges, making them highly liquid and easily accessible to investors.

Features of Gold ETFs

  • Gold ETFs are managed electronically, eliminating the necessity for storage arrangements required for physical gold. 
  • Gold ETFs are publicly traded on stock exchanges, enabling investors to engage in real-time buying and selling.
  • Gold ETFs provide a substantial degree of liquidity, granting investors convenient access to their funds and the ability to withdraw from their investments with ease.
  • The expenses associated with Gold ETFs are lower than the costs involved in acquiring, storing, selling, and insuring physical gold.

How to Invest in Gold ETFs?  

Investing in Gold ETFs is a straightforward process:

Open a Demat and Trading Account
To invest in Gold ETFs, you must have a Demat (Dematerialized) and trading account with a registered financial service provider

Choose a Gold ETF
Select one that aligns with your investment goals and risk tolerance. You can find a list of Gold ETFs on the stock exchange's website or through your stockbroker.

Place an Order
Place a buy order for the desired quantity of Gold ETF units through your trading account. You can do this online or through your broker's offline channels.

Monitor Your Investment
Once you have invested in a Gold ETF, you can monitor its performance in real time through your trading account. You can also sell your units on the stock exchange whenever you wish to liquidate your investment.

What are Gold Exchange-Traded Funds in India?   
Gold ETFs in India have gained popularity over the years due to their simplicity and liquidity. Asset management companies manage them and aim to provide returns that closely track the domestic price of physical gold. 
These funds invest primarily in standard gold bullion (99.5% purity) and are backed by physical gold held in secure vaults.

What are Gold Mutual Funds?
Gold mutual funds are investment vehicles that include physical gold bullion in their investment portfolios.

Rather than directly investing in gold ETFs, these funds allocate their investments to other securities representing ownership of specific quantities of gold bullion.

The most prevalent form of gold mutual funds is index funds, which mirror the performance of various indices, such as industry groups or market sectors.

What are Gold Mutual Funds?
Gold mutual funds are investment vehicles that include physical gold bullion in their investment portfolios.

Rather than directly investing in gold ETFs, these funds allocate their investments to other securities representing ownership of specific quantities of gold bullion.

The most prevalent form of gold mutual funds is index funds, which mirror the performance of various indices, such as industry groups or market sectors.

One notable feature of gold mutual funds is their flexibility in purchasing gold at any time, in contrast to ETFs with designated trading hours. However, it is essential to note that they typically come with higher fees than ETFs.

Unlike ETFs, gold mutual funds are not traded on stock exchanges; instead, they are professionally managed by fund managers who make investment decisions across a spectrum of assets, including stocks, bonds, and commodities like gold or silver.

Features of Gold Mutual Funds:

  • You can buy gold mutual funds without the need for a Demat account.
  • Gold mutual funds offer an easy way to gain exposure to gold.
  • Gold mutual funds serve as an effective hedge against inflation and political instability.
  • A straightforward method to expand and diversify your investment portfolio. 

How Are Gold ETFs and Gold Mutual Funds Are Similar?

Investing as an Alternative to Physical Gold

Both Gold ETFs and Gold Funds offer an avenue for investing in gold without the need for physical storage, mitigating concerns related to security and purity. These investment options collect funds from investors and allocate them to gold-related securities.  

Portfolio Diversification
Gold ETFs and Gold Funds facilitate the diversification of investment portfolios beyond traditional equity and debt assets. Recent trends have shown that gold and equity markets often exhibit an inverse relationship, where one performs well when the other is subdued, creating a valuable hedge for your portfolio.  

For instance, during periods of equity market decline, gold markets tend to perform favourably and vice versa. This balance in portfolio allocation can be particularly advantageous; if your equity mutual funds experience underperformance, the potential better performance of Gold Mutual Funds/ETFs can help prevent the overall portfolio from underperforming.

Unit Cost
Gold ETFs and Gold Funds calculate their Net Asset Value (NAV) after each business day. 
Fluctuations influence the NAV in gold prices and changes in the value of their underlying assets.  

However, it's important to note that while gold funds are bought and redeemed based on the day's NAV, Gold ETFs are traded on the stock exchange at prevailing market prices, which may or may not align with the NAV for that day.

Gold ETFs and Gold Mutual Funds
Now that we have a clear understanding of what Gold ETFs and Gold Mutual Funds are and how to invest in them let us delve deeper into their differences to help you make an informed investment decision.

Investment Structure  

Gold ETFs
These funds are structured as exchange-traded funds, which means they are listed and traded on stock exchanges like shares.
You buy and sell Gold ETF units on the exchange, and their prices fluctuate throughout the trading day.

Gold Mutual Funds
Gold Mutual Funds are traditional mutual funds that pool money from investors and invest in various assets, including Gold ETFs or physical gold.

Unlike Gold ETFs, you transact with the fund house directly at the Net Asset Value (NAV), which is calculated at the end of each trading day.

Liquidity

Gold ETFs
One of the significant advantages of Gold ETFs is their high liquidity. You can buy or sell Gold ETF units during market hours at prevailing market prices. 
This liquidity makes them an excellent choice for short-term or intraday trading.

Gold Mutual Funds
Gold Mutual Funds are less liquid than Gold ETFs. You can only redeem your mutual fund units at the end of the trading day at the NAV price. 
This means you won't benefit from real-time trading opportunities.

Expense Ratios

Gold ETFs
These funds generally have lower expense ratios than Gold Mutual Funds. The expenses are usually deducted from the fund's assets, which can impact the returns to a lesser extent.

Gold Mutual Funds
Gold Mutual Funds tend to have higher expense ratios due to the management fees and other operational costs associated with mutual funds. 
These expenses can eat into your returns over time.

Minimum Investment

Gold ETFs
You can start investing in Gold ETFs with a minimal investment, often as low as the price of one unit, which can be pretty affordable.

Gold Mutual Funds
Gold Mutual Funds typically have higher minimum investment requirements than Gold ETFs. This may be a barrier for small investors.

Ease of Buying and Selling

Gold ETFs
Buying and selling Gold ETF units is as simple as trading stocks. You can do it through your Demat and trading account, and the process is usually quick and convenient.

Gold Mutual Funds
Investing in Gold Mutual Funds involves submitting application forms and other documentation to the fund house or its agents. The process may be less user-friendly than buying and selling Gold ETFs through a trading account.

Flexibility

Gold ETFs
Gold ETFs offer flexibility regarding trading options, allowing investors to take advantage of market movements throughout the trading day.

You can place limit orders, stop-loss orders, and even short-sell Gold ETFs if your brokerage account allows it.

Gold Mutual Funds
Gold Mutual Funds lack the flexibility of intraday trading. You can only buy or sell mutual fund units at the end of the trading day at the NAV.

How to Invest in Gold in the Share Market? 
Investing in gold in the share market can be done through various means, with Gold ETFs being one of the most popular options.

Here are some other methods to invest in gold within the share market:

Gold Mutual Funds
Gold Mutual Funds, also known as Gold Funds or Gold Schemes, are a type of mutual fund that primarily invests in Gold ETFs or physical gold.
By investing in Gold Mutual Funds, you indirectly gain exposure to the price movements of gold.

These funds are managed by professional fund managers who make investment decisions on your behalf.

Gold Mining Stocks
Another way to invest in gold within the share market is by purchasing shares of gold mining companies.

These companies are involved in the exploration, extraction, and production of gold. Various factors, including gold prices, production costs, and geopolitical events, can influence the value of their stocks.

Gold Futures and Options
For more experienced investors, trading gold futures and options contracts on commodity exchanges is an option.

These derivatives allow you to speculate on the future price of gold without owning the physical metal.

However, they can be riskier and require a good understanding of the futures and options markets.

Sovereign Gold Bonds
In India, the government also offers Sovereign Gold Bonds (SGBs) to invest in gold.

SGBs are issued by the Reserve Bank of India (RBI) and are denominated in grams of gold.

They offer both capital appreciation and a fixed interest rate, making them an attractive investment option for those looking to invest in gold for the long term.

Conclusion:

Gold ETFs and Gold Mutual Funds offer unique value and cater to different investment preferences.

The choice between the two depends on your investment goals, risk tolerance, and trading preferences.
If you are looking for high liquidity, real-time trading, and lower expenses, Gold ETFs are a suitable choice.

On the other hand, if you prefer a more traditional mutual fund structure, are comfortable with end-of-day pricing, and don't mind slightly higher expenses, Gold Mutual Funds may be a better fit.

Ultimately, gold can play a valuable role in diversifying your investment portfolio and providing a hedge against economic uncertainties.

Whatever route you choose, do thorough research, consider your financial goals, and consult with a financial advisor to make an informed decision.
Investing in gold can be a rewarding endeavor, and with the options available today, you can easily incorporate this precious metal into your investment strategy.

Reference Sources:
scripbox, etmoney, indmoney, 

“Content shared is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances.”

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