Gold has evolved as the major investment asset in many of the portfolios due to its sustained growth along with the inflation and also helps the investors from the risk of volatility to a greater extent. The value of Gold does not experience wide fluctuations as it’s not directly correlated with the other financial instruments. That is the reasons why many people prefer investing in gold than any other financial instruments. Physical Gold involves other costs like their making charges, usage loss and many others. So there are two main options available for gold investment and they are Gold Exchange traded Funds and Gold Mutual Funds.
What is Gold ETF?
Investing in physical gold involves many logistics issues like storage and insurance and so on. All such issues could be avoided by investing in Gold ETF. Large amount of gold will be physically purchased by the Gold ETF and that will be stored. This fund will then issue shares in various denominations and they are traded in most of the stock exchanges.
What is Gold Mutual Fund?
Gold Mutual Fund mainly invests in securities that are issued by the companies who are involved in the mining and distribution of precious metals like gold.
Both are very good investment options and they have their own pros and cons. The following details will help in understanding them in a better way:
Price:
The price of the Gold ETF depends majorly on the international price of gold of high quality. This is transparent and the stock exchanges will list the price of gold. The changes in the gold price will have a direct impact on the Gold ETF. Whereas in case of the Gold MF the amount is invested in companies who are into gold mining and exploration etc. So though there could be a slight impact on the international gold price but the performance of the companies form a major base for the pricing of Gold Mutual Fund. So Gold ETF is a kind of investment in physical gold itself whereas Gold MF is yet another Equity fund model of investment.
Investment Method
One of the major difference in investing in Gold MF is that you don’t require a demat account. Just like any other fund you could conveniently invest in the MF without any cumbersome procedure. However that is not the case with the Gold ETF. The investment is done only through the demat account.
Liquidity Options
Gold MF is not directly influenced by the gold prices and so if there is any volatility getting advantage of that is not much possible as in case of Gold ETF. This is because the MF can be redeemed only at the recent value quoted as Net Asset Value or the NAV. For ex if you have say 500 units if Gold Mutual Fund and the NAV is quoted as Rs.200 then you will Rs.200*500units and exit charges will apply on this amount. In case of Gold ETF you could take full advantage of the rise in gold prices as it has a direct impact on the ETF during the intraday. The gold ETF if traded say at Rs.3500 and you want to sell off 7 Gms then you gets Rs.24500 which is then subject to transaction charges as well. So The Gold ETF is much easier to liquidate and benefit from price fluctuations can be reaped instantly.
Other Costs:
The Gold ETF attracts higher transaction costs in the form of brokerage and demats. Demat charges is not a high amount and is negligible if you already are trading in stocks and have a demat account. The brokerage costs will be too high if you frequently trade with the ETF. To make the best use that is to be cost effective Gold ETF is a great option for long term investors. This is not good for short term traders. In case of the Gold MF exit loads of 1% is the charge that is reduced from the sales compensation. This is negligible amount as compared to the sale proceeds. However in order to get some reasonable profit it’s better to hold the fund for a longer time and then sell off as only then the NAV will increase substantially.
Expenses
The ETF is direct investment in physical gold and so much of research and professional team is not required. But that is not the case for Gold MF wherein the investment is not in gold but in the gold companies. So lot of research and efforts to identify the profit and performing companies is very important and involves greater research costs.
Both Gold MUTUAL FUND and Gold ETF are great investment plans. The ground rule is different as one is investing in physical gold while the other in gold companies. This difference is the reason for their difference in the benefits and risk patterns.