Gold and silver ETF or mutual funds – Which investment option is more profitable?

mutual fund


India boasts a rich history and deep-rooted tradition that revolves around the investment of precious metals, namely gold and silver. These metals hold immense value not only in terms of economics but also culturally and socially. With the growth in income levels, individuals in India are diversifying their investment portfolios by channeling more resources towards gold and silver. When it comes to investing specifically in these valuable materials, Indians commonly gravitate towards two options: exchange-traded funds (ETFs) or mutual fund investments. But which option makes more sense for investors?

ETFs offer easy access and lower costs

Exchange traded funds (ETFs) have become an increasingly popular way for Indian investors to gain exposure to gold and silver. ETFs are passive investment instruments traded on stock exchanges just like stocks. They track the price of the underlying asset, which could be gold or silver.

The main advantages of gold and silver ETFs are their low costs, transparency, liquidity and ease of trading. ETFs have much lower expense ratios compared to actively managed mutual funds. Trading costs are also lower as ETFs can be bought and sold anytime during market hours at prevailing prices. ETFs hold the physical gold or silver in dematerialized form, so there is no need for investors to worry about storage and security.

Mutual funds offer active management

Gold and silver mutual funds are actively managed schemes offered by asset management companies. Fund managers make investment decisions based on price trends and market conditions. The main benefit of active management is the potential to generate higher returns compared to passive ETF investing, especially during volatile markets.

Gold and silver funds have the flexibility to alter their exposure to mining company stocks, gold ETFs, silver coins, bullion and other instruments. By adjusting allocations between physical bullion and mining stocks, fund managers can reduce risks and enhance returns.

ETFs score on liquidity

Gold and silver ETFs can be bought and sold on stock exchanges just like shares, making them highly liquid. Investors can buy or sell ETF units real-time at prevailing market prices. Gold and silver mutual funds on the other hand can only be bought or redeemed based on the end of day NAV. Redemptions typically take 2-3 business days to process. This makes ETFs the preferred option for investors who want instant liquidity.

Mutual funds offer systematic investing

While ETFs score on trading convenience and liquidity, mutual funds are better suited for systematic investment planning. Gold and silver mutual fund schemes allow monthly or quarterly systematic investment plans (SIPs) starting with small amounts. This facility of regular saving by allocating fixed amounts is not available in ETFs. For investors looking to accumulate gold and silver over long periods through SIPs, mutual funds are the ideal choice.

Which is better for Indian investors?

For most Indian investors looking to invest specifically in physical gold and silver, ETFs offer a more efficient and flexible investment option compared to mutual funds. The lower costs, liquidity and favorable taxation tilt the scales in favor of ETFs. They are easier to understand as well compared to actively managed mutual fund schemes.

However, investors looking at exposure to both physical bullion as well as mining stocks can consider actively managed gold and silver mutual funds. The potential to optimize returns through active allocation makes mutual funds attractive. They also allow systematic investment planning through SIPs which is difficult to replicate with ETFs. Ultimately, the choice between gold/silver ETFs and mutual funds depends on individual preferences around costs, liquidity, taxation and ability to make lumpsum vs periodic investments.

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