Difference Between Gold ETF and Gold Fund

Investors are looking for places of safety and security as inflation rises. Many investors see gold as a safe refuge. It provides protection and is a simple means of safeguarding investments during a market slump. If you want to add some diversity to your portfolio, consider investing in gold. Gold investments can be made in a variety of ways.

Investing in gold mutual funds or gold exchange-traded funds (ETFs) are the two most popular methods. Every choice between gold ETFs and gold funds has advantages and disadvantages.

What are Gold ETFs

A mutual fund based on commodities that invests in gold-related assets is called a gold exchange-traded fund, or gold ETF. These exchange-traded funds trade on the stock exchange like individual stocks and behave similarly.

Exchange-traded funds (ETFs) are a way to hold real assets, like gold, both in paper and dematerialized form. Instead of investing in real gold, an investor buys stocks, and when the stock is exchanged, they are credited with the corresponding amount of cash rather than real gold.

Purpose of Gold ETF

Gold ETF funds can be utilized as industry exchange-traded funds even though they are commodity-based traded funds. It's a great way to diversify your investments and gain exposure to a range of industries, including manufacturing, transportation, and gold mining. These exchange-traded funds offer an easier approach to investing in the gold market and are comparatively easier to purchase.

In addition to providing hedging against market volatility, gold exchange-traded funds (ETFs) can be substituted for insurance in an investor's portfolio. For instance, if the price of gold drops dramatically, investors can minimize their loss by using short-term exchange-traded funds.

These ETFs are among the top defensive investments on the market, according to ratings. Since many investors use it to protect their investments against economic swings and, in extreme cases, currency depreciation, it is thought to share class traits with bonds. If the dollar or other major currencies tend to decline in value, the value of gold can climb significantly. An individual can profit from that abrupt decline by investing in gold ETFs.

These traded funds are excellent long-term investments because each unit represents one gram of 99.5% pure gold. This is especially true if an investor chooses to make larger investments or trades methodically.

How Does Gold ETF Work

Gold ETFs are traded on stock exchanges and contain gold assets such as futures contracts or bullions. In this instance, the price of gold and the ETF are directly correlated.

For example, a 2% increase in the price of gold may result in a 2% approximate increase in the value of the ETF. Likewise, a decline in the price of gold should result in a decline in the value of the ETF. The ETF is available for purchase and sale on the stock exchange, just like regular equities.

What is Taxation on Gold ETFs?

The taxes imposed on gold ETFs are comparable to those imposed on buying or selling actual gold. If an investor trades these funds and profits, they will be subject to capital gains tax. Both short-term and long-term investments in these trading funds are subject to taxes.

Exchange-traded funds (ETFs) are subject to two types of taxes: long-term capital gain tax, which is imposed on investments held for 36 months or more. An investor in this scenario will be required to pay 20% capital gains tax in addition to any applicable indexations. When invested for a short period of time, exchange-traded funds are subject to capital gains tax based on the individual's existing tax slab.

Benefits of Investing in Gold ETF

• Easier Trading: Buying and selling gold ETFs is comparable to dealing with any other equity-based fund. It streamlines the entire procedure, particularly for those trading equities through an ETF funds manager or stockbroker. They can be exchanged during business hours and are much simpler to liquidate. Moreover, the stock market makes the price of gold publicly visible. An investor can monitor developments, even hourly, and the entire process is rendered visible.
• No Entry or Exit Loads: There are no entry or exit loads when buying or selling gold exchange-traded funds, so there are no extra fees associated with them.
• Tax Benefits: These traded funds are exempt from securities transaction tax (STT) and capital gains tax, which means that investors can save taxes on their investments. If someone invests in actual gold, they may be subject to wealth taxes, particularly if they buy large quantities of gold bullion or jewellery. Investments in gold ETFs are better for tax savings because they are not subject to wealth taxes.
• Less Market Risk: Gold prices often do not vary significantly, allowing investors to avoid suffering significant losses even when returns on shares do. Gold ETFs are perfect for all kinds of investors because they come in varied denominations. Starting an investment can be done with as little as one trading fund unit or one gram of gold.
• Application as Collateral: Gold ETFs may be pledged as security for a secured loan obtained from any financial organization. Compared to classical hypothecation, this offers greater convenience because the complete procedure takes much less time.

What are Gold Funds

Mutual funds that invest in gold reserves either directly or indirectly are known as gold funds. Typically, investments are placed in physical gold, mining company equities, and stocks of syndicates that produce and distribute gold. Investing in an asset without needing to buy it in tangible form is a convenient way to do it.

Open-ended investments in gold are called mutual funds, and they are based on the units that the gold exchange-traded fund offers. Since the underlying asset is stored in actual gold, the worth of this precious metal directly affects the asset's value.

An investor may also utilize these funds as a hedge to guard against a downturn in the economy. To protect themselves against the market's volatility, many people diversify their investments by allocating 10% to 20% of their portfolio to gold funds.

Purpose of Gold Funds

These kinds of investments are primarily meant to generate wealth over the investment horizon and act as a safety net against a market meltdown. Because of this, the performance of the underlying stocks in gold fluctuates a lot; for instance, a small change in the price of gold on the world market can have a significant impact on the return on its stock.

The finest gold funds' returns have the potential to surpass the value of the valuable metal itself, offering investors a potentially profitable opportunity. If an investor chooses long-term gold mutual funds (eight years or more), the returns they earn will be computed using the gold prices that are currently available on the market. If the price of gold rises when it is redeemed, it could offer a sizable return.

Taxation

Mutual fund taxes on gold in India are comparable to implied taxes on gold jewelry. Taxes are also assessed based on the length of the investment; an investment is deemed short-term if it has a three-year period between the date of investment and the date of redemption. To compute tax in this instance, the revenue is added to the investor's gross income.

Returns with tenors longer than three years are regarded as long-term investments and are subject to 20% taxation in addition to standard indexation rules. Additionally, CESS may be required in addition to other applicable taxes.

Advantages of Investing in Gold Funds

• Adaptable Investment Amount: Compared to physical gold, gold funds are more convenient since they let investors buy any quantity of money to suit their needs. This kind of fund enables people with low incomes to invest with as little as Rs. 500. It allows an investor greater freedom than buying actual gold, which is frequently very expensive.
• Extremely Liquid Investment: One further significant benefit of a gold mutual fund is its ease of liquidation at short notice. These funds are perfect as a safety net to guard against unanticipated events because trading them is simpler than liquidating other kinds of assets. Furthermore, there is no minimum amount that can be redeemed so that each person can redeem in accordance with their financial needs.
• Safe Investment Avenue: Since the Securities and Exchange Board of India (SEBI) regulates mutual funds, gold funds are among the safest investment possibilities. Investors can measure and forecast their returns with the assistance of SEBI's periodic reporting and monitoring of these funds.
• Safer Than Holding Real Gold: Gold funds are digital assets that spare you the trouble of holding real gold. As a result of its dematerialization, it is among the safest substitutes for investing in tangible assets on the market right now.
• Diversify Your Investing Portfolio: Gold mutual funds are a great way to spread out your holdings and lower your exposure to market risk. Prices for gold as a tangible asset are unrelated to those of corporate stocks. By guaranteeing returns if other asset groups underperform, investors can reduce market risk.

Difference Between Gold ETF and Gold Funds

Conclusion

The main result is that both ETFs and gold funds are sound financial choices; which one you select may depend on your preferences. For individuals looking to make regular long-term investments, gold funds are a suitable choice.

Gold ETFs, on the other hand, are a better option if you wish to store your gold in a Demat account and may eventually need to convert it into real gold. It's up to you to decide!