Gold ETFs or Gold Funds - Which one is better for investment?
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In one of Vikas Sonigara's previous articles, he had listed the various ways in which one can invest in Gold in India. The inference drawn was that for a retail investor, Gold ETFs or Gold Funds are the best options to explore further.
While Gold ETFs have been in the markets since almost 5 years, Gold Funds are relatively new products introduced very recently (just about a year or so).
Let us see how Gold ETFs have performed over the last few years as compared to physical gold.
From the above we can see that returns from Gold ETFs have been more or less tracking returns from physical gold.
Gold Funds primarily invest in an underlying Gold ETF with some portion of the funds parked in liquid assets. Now let us compare the performance of Gold Funds and the underlying ETFs.
E.g. HDFC Gold Funds would invest in HDFC Gold ETF and so on
From the above we can see that Gold Funds have performed better than Gold ETFs over the last 1 year when Gold prices have been spiraling southwards. One primary reason for the same is that Gold Funds, being mutual funds in nature, do keep some portion of their capital (5-10%) in liquid funds in order to cater to redemption requests.
Let us compare some more parameters in details and understand which one is a better option -
STCG – Short Term Capital Gains Tax – As per your personal income tax slab
LTCG – Long Term Capital Gains Tax – Flat 10% or 20% after indexation
From the above we can see that it is much easier to invest in a Gold Fund as it doesn’t require any demat or trading account though it is little expensive. Also it is possible to set up a SIP in Gold Funds which otherwise would not be possible in an ETF (unless one dedicatedly buys every month on the same day as SIP).
Hence in Vikas Sonigara's view it is much better for a small retail investor to invest in a Gold Fund by executing a SIP than Gold ETFs. The additional charges which one has to incur in Gold Funds are generally offset by the brokerage one pays when one buys ETFs. Also one has to incur maintenance charges for demat and trading account (which may pinch if the demat and trading account are opened solely for the purpose of trading in gold ETFs).
Also now days with DIRECT investment option, the charges on Gold funds have come down from 0.5-1% to 0.3-0.75% which further reduces the costs of investing in Gold Funds.
Hence if a small retain investor has made a decision to invest in Gold, Vikas Sonigara's personal take is Gold Funds.
One can select a fund which has offered returns in line with Gold and with minimum expense ratio.
The author can be contacted at [email protected]
Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. The author does not accept any liability whatsoever arising from the use of any of the above contents.
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