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Thursday, January 8, 2015

Gold Funds Vs Gold ETFs

When it comes to having a balanced portfolio, Gold is one commodity that provides a key balance. If you are serious about Gold as an electronic investment, you must understand the options available to you : Gold Funds, Gold ETFs, and e-Gold. Let us have a closer look so that you can invest it right..read on..


Gold is an essential ingredient of any portfolio. The general guideline is to have 5-10% of your portfolio invested in Gold, the true form of money. Having more Gold will reduce your overall portfolio returns. Having less Gold will not provide the required hedge to your portfolio.

We have already studied about the differences between e-Gold and Gold ETFs. Click here to read it now. Today we will focus on Gold Funds Vs Gold ETFs. Both have their advantages as well as their limitations, so let us carry out an analysis to see which one works well for you.

What are these?
Gold ETFs are funds that invest in physical gold of 99.5 per cent purity. A gold ETF invests 90-100 per cent in physical gold sourced from the RBI approved banks and 0-10 per cent in debt instruments. It is for this reason that Gold ETF returns are mostly in line with the prices of physical gold.
On the other hand, a Gold fund is an open-ended fund that invests in a gold ETF.

Minimum Purchase
Since ETFs are direct investments in Gold, the minimum that you can buy in ETFs, is gold worth at least one unit, which is equivalent to one gram of physical gold.
In case of Gold funds, there is no such minimum constraint. You can start with an investment as low as Rs. 500/-

Liquidity
The units of gold ETFs are traded in exchanges and hence offer high liquidity at the right price for both buyers and sellers. 
However, this liquidity varies across fund houses, which makes liquidity an important factor when investing in a gold ETF.  Look for funds with high liquidity in the exchange.

Ease of investing
For an investor, buying a gold fund is easier because you don't need a demat account, which is required to invest in a gold ETF. 
Investors in gold funds can invest through the SIP route, which is not possible when investing in the ETF.

Expenses and Returns
Both these forms of investments in gold track the price of gold and have similar returns. 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. Gold Funds typically charge annual expenses of about 1.5 per cent of the asset under management, whereas it is around 1 per cent in case of gold ETFs.

When should you go for ETFs?
  • You are an avid investor.With an ETF, you will have to time your purchases right and execute your purchase orders on your own.
  • You already trade using a demat account
  • Returns are a high priority for you and you are ready to invest some time monitoring the ETF in the exchange.
When should you go for Gold Funds?
  • You are looking at convenience more than the returns.
  • You do not trade using a demat account
  • You are not an avid investor and have trouble tracking market regularly
  • You prefer to invest via SIPs and withdraw via SWPs so that you are not bothered to track.
  • You do not wish to face liquidity risk and want to buy and sell at the NAV anytime.

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Manoj Arora
Freedom can buy you.... what money cannot !!

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