Mutual Funds

Gold funds or gold ETFs?

Nalinakanthi V | Updated on November 22, 2014

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As an investor, which route should you take? Here’s information to help you choose

Looking to invest in gold? In case you wish to buy gold in electronic form, mutual fund houses offer two options — gold exchange-traded funds (ETFs) and gold funds.

Gold ETFs are listed and traded on the stock exchanges. Gold funds are mutual funds that invest in gold ETF units. Both have their advantages as well as their limitations, so carry out an analysis to see which works for you.

Who should go for ETFs?

If you are an avid investor and track gold prices closely, you can take the ETF route to invest in gold. ETFs are similar to equity shares and are traded on the stock exchange.

To buy a gold ETF, you need a demat account and a broking account. If you have a demat account, the only cost that you may have to incur when buying an ETF unit is the brokerage.

With numerous fund houses offering gold ETFs, what are the factors you need to keep in mind while choosing an ETF?

Though all ETFs have gold as the underlying asset, it is important to invest in ETFs that are frequently traded on the exchange, for two reasons.

One, if you opt for an ETF that is less liquid, selling it whenever you wish to liquidate your investment may not be an easy proposition.

Second, if the ETF is less liquid, then the price of the ETF from day-to-day is less likely to reflect the price of the underlying gold. Such ETFs may trade at prices that are very different from the underlying gold, impacting your returns.

Who should go for gold funds?

Gold funds are better suited for investors who do not have a demat account and are not active traders or investors in stocks. Here the fund collects money from you to invest in ETF units via the stock exchange.

Since this investment is made through a mutual fund, you can opt for systematic investments or withdrawals too.

With an ETF, you will have to time your purchases right and execute your purchase orders on your own.

Investing in a gold fund can save you the hassle of deciding when to buy and going through the actual buying procedure all by yourself.

As gold fund units can be bought or sold from the fund house, you do not face liquidity risk, as in the case of ETFs, and can buy and sell at the NAV.

But the convenience of gold funds comes at some additional cost.

You may have to pay an extra 0.5-1 per cent of your investment as management fees.

Hence, when gold prices are headed up, the returns of gold funds will be lower than the gains made by an exchange-traded fund to the extent of the management fee charged by the fund's promoter.

Published on April 20, 2014

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