In this article we will explore the relative merits and demerits of investing in Gold Funds vis-a-vis gold ETF.
To begin with, both Gold ETF and Gold funds are mutual fund products but with a different mode of purchase. The Gold ETF can only be bought or sold through a platform of Stock Exchange and you cannot purchase or sale of Gold ETF 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 mutual fund or stock exchange.
also Read [5 Type of Investment in Gold]
also Read [5 Type of Investment in Gold]
Ease of investment
A de-mat account with a broker registered either with BSE or NSE is needed in case of investment in Gold ETF. But only a few people in India have a de-mat account due to various reasons. However one can invest in units of gold funds from mutual funds without a de-mat account. This way we see that for larger population it would convenient to invest through Gold Fund rather than investing in Gold ETF through a broker of a stock exchange.
Benefits of Systematic Investment Plan
By investing a fixed sum of money every month, you get the benefit of rupee cost averaging, similarly Gold funds provide you this benefit where you can invest fixed sum of money in the units of Gold Fund sailing through high and lows of the gold. Systematic Investment Plan ensures that you buy lesser quantity when the prices are high, and enables you to buy higher quantity 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 investment in Gold ETF because here you cannot invest fixed sum of money, but only fixed quantity of units of Gold ETF at varying prices.
Currently there are around a dozen gold ETF listed on the stock exchanges but all do not have that much liquidity and the volume of ETFs traded on the stock exchanges of others is not very significant. This raises an issue of liquidity of the investment through gold ETF. However 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 credited in your bank account. This ensures that you are able to get your money back whenever you need it.
The tentative annual expenses of the gold mutual fund is around 1.50% of the asset under management whereas it is around 1% in case of Gold ETF funds generally.
On the face of it, the investment in Gold ETF 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 ETF, the full annual cost will have to be loaded 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 a period of one year from the date of purchase. The fun houses charge anything between 1% to -2% if you exit the fund within between six months and 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 Fund house of Gold fund of 1.5% and 1% applicable to Gold ETF will translate into a very big amount over the period. This is because the transaction cost of buying or selling Gold ETF is only one time cost and not the 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 brokers 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
The Gold Mutual Fund is normally attractive for those who want to take the benefits of rupee averaging principle through systematic Investment Plan. However for those who are actively involved in the market as traders and not as long-term investor, this may not work because the 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 the active traders, the route of Gold ETF provides the opportunity to benefit from sudden price movement of the 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 on yesterday.
As the saying goes, one cap cannot fit all the heads, you have to decide which cap perfectly fits your head size.
Now the choice is yours, which way you want to reap the GOLD.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)