With the unprecedented Covid-19 creating havoc across the globe, the country is soaking up fear and grief and tomorrow seems unpredictable than ever. Such uncertainty drew investors to gold as a safe haven. Amidst the pandemic, gold prices have surged indicating that the precious yellow metal is a go-to choice for investors. From an investment perspective, one can buy physical gold, invest through gold Exchange Traded Funds (ETFs) or invest in gold mutual funds.

Gold ETFs

Gold ETFs are an exchange-traded fund that allows you to invest in gold in dematerialised format and performs like an individual stock that can be traded on the stock exchange. To buy ETFs from the stock exchange, one needs to have a demat account. The unit price of a gold ETF is associated with the price of one gram of 24 karat gold. This suggests that the returns received on gold ETFs are proportional to the price of gold.

Gold ETFs come with a high liquidity feature as the funds are traded on the stock exchange at the prevailing price. It is a great choice for people who want to earn inflation-beating returns in the long run. Also, they ensure that the purity of gold is not compromised as they invest in 99.5 per cent purity gold bullion, which is equivalent to holding the gold. Gold ETFs perform as a cushion against uncertain times.

The tax component in gold ETFs is similar to that levied on the purchase and selling of physical gold. The investors have to pay taxes on short-term and long-term capital gains.

Long-term capital gain tax: It is applicable to investments that are for 3 years or long. Here, the investor has to pay 20 per cent tax along with the applicable indexation.

Short term capital gain tax: It is applicable for investments that are less than 3 years. In this case, the taxes apply as the current tax slabs.

In the financial year 2020-21, gold ETFs have witnessed the highest net inflows of Rs 6,918 crore, which has increased more than four-fold against the year 2019-20.

Gold mutual funds

Gold mutual fund investments are open ended investments. Investors can invest in gold mutual funds without having a demat account. The assets of a gold mutual fund are invested in the units of gold ETFs. This is a good investment option if you want to invest in it as a regular investment instead of a one-shot investment. Gold funds are a popular choice among investors as there are professional fund managers who manage the fund. The returns on gold funds closely match with the returns of gold ETFs. Moreover, the Net Asset Value (NAV) of the gold fund is determined by the overall price movement of gold in the market. The gold funds are purchasing and selling at ongoing market rates of gold. Even the gold funds act as a buffer in times of market collapse as the price of gold is not dependent on the market movements. The tax component in gold mutual funds is similar to gold ETFs. Gold mutual funds can provide significant returns if the gold prices are soaring at the time of redemption.

Difference between Gold mutual funds and Gold ETFs

1. Pricing: The price of gold ETFs are available as real time updates as they are listed on the stock exchange. While, for gold funds, the price is in terms of NAV which is declared at the end of trading hours.

2. Liquidity: As the gold ETFs are listed on the stock exchanges, the gold ETFs offer higher liquidity than gold funds. ETFs do not charge any exit loads due to which the investors can trade the units during the market hours.

3. Minimum investment amount: The minimum investment amount for one unit of gold ETF depends on the prevailing price of 1 gram of gold which is close to Rs 4,850 currently. Whereas, the investor can start with a SIP of Rs 1,000 with gold mutual fund investing.

4. Expense ratio: As the gold fund invests in gold ETF, gold funds have a higher expense ratio than gold ETFs.

5. Systematic Investment Planning (SIP): SIP option is available in gold funds. On the contrary, only lump sum investments are allowed in gold ETFs. SIPs offer compounding benefits as well as provides the benefit of rupee cost averaging.

6. Mode of investment: To invest in gold ETFs the investor needs a demat account just like you need one while investing in shares on the stock exchange. This makes the process quite longer. Gold mutual fund investments do not need a demat account.

Conclusion:

Gold ETFs and gold mutual funds both are appealing investment alternatives. It is important to track the gold prices as well as your risk appetite and financial goals and then make an investment decision. It’s rightly said that every rose has its thorn. Similarly, even gold ETFs and gold mutual funds also have their thorns meaning it has its pros and cons so you need to be careful while making an investment decision. It is imperative to check the performance of the ETF or mutual fund before investing.

The author is Co-founder, Tarrakki

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.