Gold Fund vs Gold ETF: Which Is Better?
Gold rate

Are you seeking a hedge against inflation? Do you want to diversify your portfolio against a crashing stock market? You may consider investing in Gold ETFs or gold funds. It helps you buy gold in dematerialised form instead of physical gold. You can avoid paying making and wastage charges and also the hassles of storage. Should you invest in gold funds or Gold ETFs? 

What are Gold ETFs and gold funds?

You have Gold Exchange Traded Funds or Gold ETFs tracking the domestic price of physical gold in India. It helps you invest in gold online in a dematerialised or paper form. 

You have each unit of Gold ETF representing one gram of gold of 99.5% purity. You have the physical gold that backs Gold ETFs stored in secure bank vaults. Moreover, Gold ETFs are traded on the stock exchanges such as NSE and BSE and can be purchased similarly as shares. 

You have gold funds as open-ended mutual funds that invest predominantly in units of Gold ETFs. It mimics the price of domestic gold similarly to Gold ETFs. However, gold funds have a fund of funds (FoF) structure which means you incur a higher expense ratio. 

Should you invest in gold funds or Gold ETFs?

You may invest in Gold ETFs or gold funds to protect your portfolio against adverse stock market conditions. It helps as experts recommend allocating a minimum of 10%-15% of gold holdings in your portfolio. 

You may invest in Gold ETFs if you are a Do-It-Yourself or DIY investor who understands the price movements in gold. However, you need to open a Demat and trading account to invest in Gold ETFs.

You may invest in gold funds if you are a novice investor in the gold market. It helps as you don’t need a Demat and trading account to invest in gold funds. You could invest in gold funds through the systematic investment plan or SIP. It helps you stagger your investment in gold over some time and average out the purchase price of gold fund units. 

You may invest in gold funds through SIP if you seek a regular investment in gold over time. Moreover, it serves as an effective way of building up your requisite portfolio allocation towards gold. You may invest a minimum of Rs 500 per SIP instalment in gold funds. 

You may consider investing in Gold ETFs if you seek a one-shot investment in gold to build the requisite portfolio allocation. Moreover, it is a cost-effective way to incur a lower expense ratio compared to gold funds.

You may invest in Gold ETFs and gold funds to achieve the requisite allocation towards gold in your portfolio. You could pledge the units of Gold ETF and avail of a loan against them. However, Gold ETFs don’t have an exit load, whereas gold funds may have an exit load. In a nutshell, you can choose between Gold ETFs and gold funds depending on your knowledge and comfort levels in these investments. 

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For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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