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Gold ETF or gold fund — which is the better bet?

Tuesday, 22 March 2011 - 2:40am IST | Place: Mumbai | Agency: DNA
Let us explore the relative merits and demerits of investing in these gold funds vis-a-vis gold ETFs.

The consistent rise in gold prices and the growing interest of investors in gold exchange traded funds (ETFs) appear to have led two mutual fund houses to launch schemes where you can directly invest in gold through the mutual fund scheme.

Let us explore the relative merits and demerits of investing in these gold funds vis-a-vis gold ETFs.

Ease of investment
To be fair, both gold ETFs and gold funds are mutual fund products — only the mode of purchase differs.

Gold ETFs can only be bought or sold through a platform of stock exchange and you cannot purchase  these units directly from the mutual fund.

However, with introduction of the facility of purchase of mutual funds units on the stock exchange platform, you can invest in the units of gold funds either through a mutual fund or a stock exchange.

A demat account with a broker registered either with the BSE or the NSE is needed in case of investment in gold ETFs. But very few people in India have demat accounts, due to various reasons.

However, one can invest in mutual funds without a demat account. Hence, the number is much larger for people who have invested in mutual funds without having a demat account.

Thus, a larger population would find it convenient to invest in gold funds rather than in gold ETFs.

Benefits of systematic investment plan
By investing a fixed sum of money every month, you get the benefit of rupee cost averaging. Gold funds provide you this benefit, where you can invest a fixed sum of money in units of gold fund sailing through the highs and lows of gold. Systematic investment plan ensures that you buy fewer units when the prices are high and more units when the prices are lower. This way, you get better average cost of purchase, known as ‘rupee cost averaging’.

This benefit is not available for investments in gold ETFs because here you cannot invest a fixed sum of money and can only buy a fixed quantity of units of gold ETF at varying prices.

Currently, there are around a dozen gold ETFs listed on the stock exchanges. But barring the gold ETF of Benchmark Fund, known as Gold BeES, and the gold ETF of Reliance, their traded volumes on the stock exchanges are not significant. This raises an issue of liquidity of the investment. In case you invest in gold through gold funds, you can surrender the units to the mutual fund at any time and based on the payment cycle, you will get your money. This ensures that you are able to get your money back whenever you want.

Costs involved
The tentative annual expenses of the gold mutual fund is projected to be around 1.5% of the asset under management, whereas it is around 1% in case of gold ETFs generally.

On the face of it, the investment in gold ETFs looks comparatively cheaper than the gold fund, but this not so always. In addition to the 1% cost of annual expenses of the mutual fund managing the gold ETF scheme, you have to pay brokerage every time you buy and sell the gold ETF. Moreover, there is an annual cost of maintaining the demat account. If you have opened the demat account only for the purpose of buying and selling gold ETFs, the full annual cost of around `300 will have to be loaded on to the cost of gold ETF.

Though there is no entry load in case of gold fund, you need to take into account the exit load the fund house will charge in case you exit the fund within one year from the date of purchase. In case of Kotak Gold Fund, the exit charges will be 2% if you exit the fund within six months but you will be charged 1% if you redeem the units after six months but before completion of one year.

Since the gold ETF is traded like equity shares, the restriction of early exit does not apply. Therefore, gold ETFs will work for you if your purpose of putting money is either to take benefits of short-term volatility in the gold prices or accumulation of gold over a longer period of time.

It is worth noting that the cumulative difference between the annual expenses of a fund house of 1.5% for gold funds and 1% for gold ETFs will translate into a very big amount. This is because the transaction cost of buying or selling gold ETFs is only a one-time cost and not a recurring cost.

Maintenance of historical cost
For investments made through gold funds, the mutual funds send you a quarterly statement of the transactions displaying dates, rates and the cost of transaction. This can be used for your records for maintenance of historical cost for calculation of capital gains as and when you sell the units. However, for your transactions in gold ETF, you need to preserve all the broker invoices and maintain separate records for history of the cost of purchases at various points of time. This becomes cumbersome.

Taking benefits of volatility in the market
Gold funds are typically attractive for those who want to take the benefit of rupee cost averaging principle through a systematic investment plan. However, for those who are actively involved in the market as traders and not as long-term investors, this may not work because the net asset value (NAV) of the fund at which the fund sells the units is based on the closing NAV calculated based on price of the gold on the previous day. However, for active traders, gold ETFs provide an opportunity to benefit from sudden price movements of gold as the prices of gold ETF reflect the value of the underlying gold on real time basis rather than on the price of the gold yesterday.

As the saying goes, one cap cannot fit all the heads. You have to decide which cap perfectly fits your head size.

The writer is CFO, ApnaPaisa.com, a price comparison engine for loans, insurance and investments. He can be reached at balwant.jain@apnapaisa.com.

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