Gold is seen as a symbol of wealth from ancient times in India, and more often it is also used to hedge against inflation.
One can invest in this precious metal in different ways, for instance, investing through physical gold, Gold ETFs, Gold mutual funds, and sovereign gold bonds. Having said so, experts say, investing in gold ETFs and gold mutual funds is a better way of investing in gold.
For instance, physical gold is best suited for ornamental applications. On the other hand, even though Gold ETFs and Gold Mutual Funds are quite similar, they come with some differences.
Gold ETFs are commodity-based mutual funds that invest in gold as the principal asset. Gold ETFs are passive investment instruments that aim to track the domestic gold price. It invests either in physical gold or stocks of companies engaged in gold mining or refining. The units of a gold ETF are traded on a stock exchange, just like stocks. One unit of a gold ETF represents one gram of gold. Investors need to have a Demat account to invest in gold ETFs.
Gold mutual fund, on the other hand, works on a fund of fund structure that primarily invest in Gold ETFs as an underline asset. Gold mutual funds are equity funds – wherein the portfolio consists of stocks of companies involved in gold mining, production and distribution. Investors don’t need to have a Demat account to invest in gold mutual funds. Gold mutual funds may also invest in gold ETFs.
With investment in Gold ETFs, it is mandatory to have a Demat account, as investments can be made only in a dematerialized form. While investment in a Gold Mutual Fund can be made even without a Demat account. Being a mutual fund scheme, gold MFs offers a minimum amount as low as Rs 500 or prescribed in the scheme.
Experts say, for investors looking to make a regular investment instead of a one-shot investment, then the gold fund option is better and rewarding. However, for those looking for a cost-effective option to invest in precious metal, then gold ETF is considered to be the right choice.