How is gold ETF & mutual fund better than digital & physical gold?

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How is gold ETF & mutual fund better than physical gold? | Vrid
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As requested by subscribers, we will dive deeper into the many ways accessible to invest in gold. Get ready to immerse yourself in gold.

Also, we have a special recommendation at the end of this blog.

Estimated read time: 3 minutes and 50 seconds

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In one of our previous blog, we discussed everything about digital gold and the flaws of physical gold. In the end, we told you that sovereign gold bonds are best for investment in gold. And the good to better investment range looks like this –  

SGB > Gold ETF > Gold Mutual Fund > Digital Gold > Physical Gold

Our today’s focus will be on gold ETFs and mutual funds. Let’s see how you can invest in them and how they are better than digital and physical gold.

What are gold ETFs?

One of the efficient ways of investing in gold is through gold Exchange-Traded Funds (ETFs). A gold ETF aims to track the domestic physical gold price. They invest in gold bullion.

One gold ETF unit is equal to 1 gram of physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Buying Gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. 

While AMCs do offer an option to receive physical gold if you own more than 1kg of gold in ETFs when you redeem your gold ETF, most investors redeem gold ETFs for cash.

Also, we discussed the basics of ETFs and compared them with index funds here.  

What are gold mutual funds?

Gold mutual funds invest in gold ETFs and gold mining companies. 

Wondering why should you invest in gold mutual funds if they too invest in gold ETFs?

Mutual funds provide some benefits like the SIP option and no spread risk. Check the major difference between Gold ETF and mutual funds in the below table.

Comparison between Gold ETF and Gold Mutual Fund | Vrid

The summary of the table is investing in gold ETFs is better, but it comes with some complications as it is an ETF. 

You can’t start a SIP in an ETF like mutual funds. You need to look for volume, expense ratio, tracking error, performance, spread changes, and other things while investing in ETFs. We have covered these things in deep here. Check it out. 

Advantages of investing in gold ETFs and mutual funds over physical gold

1. Low minimum investment amount

You can start investing with a minimum of ₹1,000. You can create SIP in gold mutual funds. Whereas the lowest amount of physical gold you can buy is 500 mg or 1 gram. That’s a minimum investment of around ₹3,000. You can’t invest lower than that.

2. No making charges and GST

When you buy physical gold, you pay making charges in the range of 1% to 20%. Some ornaments have higher making charges. You also have to pay a GST of 3%. 

With gold ETFs and mutual funds, you don’t have to pay any making charges or GST. These funds have an expense ratio of 1%, and brokerage charges around 0.5% or less. 

3. Best gold purity

Finding out the purity of the gold is tough. Many people aren’t aware of the difference between 24, 22 and 18-carat gold. They don’t check for hallmark markings. 

You don’t have to worry about the purity of gold in ETFs and mutual funds. They invest in physical gold of 99.5% purity sourced from banks and approved by RBI.

4. No storage and theft risk

While investing in ETFs and mutual funds, you don’t have to think about storage, fraud, theft, or having to pay extra for a locker.

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5. No wealth tax

If you own physical gold worth over ₹30 lakhs, you have to pay a wealth tax of 1%. You don’t have to pay any wealth tax on ETFs and mutual funds. 

6. High ROI

As you don’t have to pay any making charges, GST or wealth tax, your cost of owning gold is low. This increases your returns on investment. 

Advantages of investing in gold ETFs and mutual funds over digital gold

1. No GST

While buying digital gold, you have to pay a GST of 3%. In ETFs and mutual funds, there are no such charges.

2. Long holding period

You can hold gold ETFs and mutual funds for as long as you want. In digital gold, after 5 years, you have to sell the digital gold or take physical delivery of gold. 

3. Low charges

In gold ETFs and mutual funds, we have expense ratio and brokerage fees to pay, but these are lower than the charges digital gold provides charge you through the spread. 

4. No limit on investments 

There is no limit on investment amounts in gold ETFs and mutual funds. Whereas in digital gold, you might have to go through a lot of paperwork before you can invest above ₹2 lakhs. 

5. Regulation

SEBI or RBI do not regulate digital gold companies. Whereas SEBI and RBI regulate gold mutual funds and ETFs. 

Even with all these benefits, gold ETFs and mutual funds fail to provide a way to earn passive income, just like digital and physical gold.

You can choose to invest in gold ETFs or mutual funds based on your preference, but before deciding, do check out sovereign gold bonds.

Waiting for the special recommendation? Are you fascinated by how gold has transformed our life through developments in space, machines, jewellery, and medicine? Check out this beautiful series produced by World Gold Council – The Golden Thread.

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Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

Live Mint – Gold ETFs trading at a premium to NAVs – should you buy?

Scripbox – Gold ETF vs Gold Mutual Fund

Scripbox – Physical Gold vs Gold ETF

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.


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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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