Gold mutual funds or ETFs: Which is a better investment option?

Gold is an inherent part of any investment portfolio whether it is a hedge fund or a retail portfolio. One can invest in gold as an asset by either buying physical gold or by investing in them electronically through paper gold. Among all the gold investment avenues available, gold Exchange Traded Funds (ETFs) and mutual funds (types of paper gold) are considered to a better option as these are available throughout the year.

Also, they offer better liquidity and safety, say experts.

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Nevertheless, investors may get confused between these two investments because of the similarity in nature.

Gold mutual funds are open ended funds that allows the citizens to invest without a demat account whereas gold ETF requires a demat account where the gold almost equivalent of physical are deposited in an electronic form.

"In gold MFs, there are asset management firms who purchase gold on investors’ behalf through ETFs. This is like any other mutual fund investment process," explains Aditya Pethe, director, WHP Jewellers -- a luxury goods and jewelry company.

(Also read: Gold ETFs versus sovereign bonds: Where should you invest)

"The convenience of investing in gold MF via a broker is a bit expensive than compared to gold ETF. The annual expense is about 1.5 percent of the asset under management, whereas it is around one percent in case of gold ETFs," Pethe added.

The gold fund units are determined by way of Net Asset Value (NAV), which is disclosed at the end of the trading hours.

"However, as gold ETFs are listed on the stock exchange, one can get real-time updates about their price," according to ClearTax.

Gold funds are SIP based whereas gold ETF are not SIP based.

"Due to this gold ETFs offer more flexibility to seasoned investors to study the market and invest as per their understanding. SIP based investment, meanwhile, makes it easier for a layman to invest in gold," suggests Vaibhav Saraf, director, Aisshpra Gems and Jewels -- a luxury good and jewelry company.

Gold funds invest in gold and other liquid funds also depending on the market, which is not the case with gold ETF.

"Gold ETFs invest 90 percent to 100 percent in 995 pure gold and remainder goes in debt," says Snehal Choksey, director, Shobha Shringar Jewelers.

Gold ETFs offer better liquidity, which makes it an important factor when investing in gold, says Ishu Datwani, founder, ANMOL -- a jewelry entrepreneur.

Unlike gold funds, ETFs don’t have any exit loads, which means investors can buy or sell the units at any time during the market hours. Units of gold funds can be redeemed by selling them back to the fund house based on the NAV for the day.

One unit of gold ETF means 1 gram of gold. Whereas gold funds are equivalent to SIPs and investments are done in rupees, in multiples of Rs 1,000.

One can convert ETF into metal whenever needed while gold MF, like any other equity, stays in demat account.