Gold is typically unaffected by volatile economic conditions such as inflation. However, gold investing has become sophisticated in the last few years with more investors opting for gold exchange traded funds and mutual funds.
What is Gold ETF investment?
A gold ETF is a form of exchange-traded fund that can be used to replace physical gold. Investing in Gold ETF is almost the same as buying units of a mutual fund scheme. The underlying asset of a Gold ETF is physical gold, so any change is the gold price is captured with over 90% accuracy by these ETFs. Gold ETFs can be bought anytime like normal shares but you need to have a demat account to buy Gold ETF from the secondary market.
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Analysts say with equity markets showing extreme volatility, investors should increase their allocation to gold by up to 15% of their investment portfolio by investing in paper gold- Gold ETF or Sovereign Gold Bond (SGB). While financial planners typically suggest 5-10% allocation to gold, the present uncertain situation calls for a higher allocation to the yellow metal. According to experts, as an investor, the right way to increase exposure to the yellow metal is by buying either Gold ETF or SGBs, which have low expense ratio and reflect the price of actual gold.
Physical gold investment is inconvenient and risky, as any investor knows. On the other hand, the reserves of an ETF are completely transparent due to its clear gold pricing. Additionally, relative to physical gold investments, ETFs have much lower expenses due to their special structure and creation process. Gold ETFs invest in 99.5 percent purity gold bullion, which is equivalent to holding the gold. Gold ETFs are ideal for those who choose to use gold as an investment option rather than for personal use. Gold ETFs can be used as a buffer against any form of uncertainty.
Gold mutual fundsGold funds are a type of mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies. It is a convenient way to invest in an asset without having to purchase the commodity in its physical form. Gold mutual funds are open-ended investments, based on the units provided by the gold Exchange Traded Fund. As the underlying asset is held in the form of physical gold, its value is directly dependent on the price of the precious metal.
Gold funds invest in gold bullion and depend on instruments that are directly linked to gold prices. Gold mutual funds, like any other mutual fund, earn returns based on the performance of their underlying investment. The NAV of gold funds changes in this situation as the price of the gold ETFs in which they have invested changes. You will be investing in gold at the current rate if you purchase a gold fund. You will be selling gold at the current rate when you redeem. You’ve made money on gold if the price of gold at the time of redemption is higher than the price at the time of investment.
Difference between gold mutual funds & ETFs
Minimum amount: Gold Mutual Funds require a minimum investment of Rs 1,000 (as a monthly SIP), while Gold ETFs usually require a minimum investment of 1 gram gold, which is close to Rs 4,500 at current rates.
Investment mode: While SIP-based gold funds are available, SIP in gold ETFs are not. Without a Demat account, Gold mutual funds may be purchased from mutual funds. However, Gold ETFs are traded on the exchanges and need a Demat account.
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Transaction Cost: The management costs of Gold ETFs is lower than Gold Mutual Funds. Additionally, Gold MFs investing in Gold ETFs also have Gold ETF costs.
Transferability: Whenever required, the investor can convert ETF to metal while gold MF stays on a Demat account, like any other equity.
Liquidity: Unlike gold funds, ETFs have no exit loads, which ensures that investment companies can buy or sell the units during the market hours at any time. The sale to the fund house on the NAV of Units of Gold Funds can be redeemed by day.
Taxation: If you invest in gold by mutual funds or exchange-traded funds, the long-term capital gains tax rate would be 20% plus a 4% cess. Short-term investors (those with a holding period of fewer than 36 months) would not be subject to direct taxation on their profits. Instead, those earnings are applied to their other earnings, and taxes are levied according to the relevant slabs.
