Difference Between Gold ETF & Gold ETF FoF

Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment

Article Summary

• Gold Exchange Traded Funds (ETFs) and Gold ETF Fund of Funds (FoF) help investors take exposure to gold without facing issues related to purity, security, and storage costs besides erosion of value during the sale of gold jewellery.

• For investing in Gold ETFs, as for investing in other ETFs and shares, you need a demat account. On the other hand, you can buy Gold ETF FoF like any other mutual fund without demat account.

• While Gold ETF prices are available on a real-time basis, the value of Gold ETF FoF is based on day-end NAV.

• Gold ETFs have lower fund expenses than Gold ETF FoF.

• Gold ETFs must be sold in the market while Gold ETF FoF units must be redeemed like units from any mutual fund.

Through the ages and across the world, the lustre of gold investments has remained undiminished for investors. It has not only been universally accepted a store of value or wealth but also considered appropriate for emergencies. However, traditionally people have invested in gold in the form of jewellery and artefacts, while some invested in coins and bars. Investments in physical gold face some significant challenges.

Issues with Physical Gold Investments

Purity Buying gold with the highest level of purity can be a challenge for many, especially those uninitiated to gold buying.

Security and storage Being high value physical investments, you need to secure physical gold in a locker for which you need to pay regular rent.

Loss during sale Typically, during sale of jewellery, you can’t recover making charges and taxes paid like Goods and Services Tax (GST).

Advantages of Gold Investments 

Despite the availability of equity, debt and other investments, gold investments need to find a place in the investment portfolio of the new-age investor too. Gold helps investors weather the impact of financial and political storms on investments, being mostly delinked to developments impacting financial assets. As a result, it helps investors with more consistent portfolio returns. Finally, gold investments have mostly been found to be an effective tool for combatting inflation which lends a helping hand to those aiming to save substantial amounts for major financial goals in the distant future.

Given the limitations of investments in physical gold, investors can consider the two appealing alternatives of Gold Exchange Traded Funds (ETF) and Gold Mutual Funds or Gold Fund of Funds(FoF).

What is a Gold ETF? These are ETFs offered by mutual funds and aim to track the domestic physical gold price by investing in gold bullion. In effect, investing in gold ETFs means investing in gold in electronic or digital form, bypassing all the challenges of physical gold. One Gold ETF unit is equivalent to one gram of gold of very high purity, typically 99.5% purity. Like other mutual fund schemes, Gold ETFs adhere to mutual fund regulations and are under the regulatory supervision of the Securities and Exchange Board of India (SEBI). 

How do Gold ETFs work? Like stocks and other ETFs, you can buy and sell gold ETFs on stock exchanges like BSE and NSE during market hours. In effect, gold ETFs combine the ease of stock investing with a commodity like gold. Since Gold ETFs follow domestic gold prices, this makes them passive mutual funds sans active investment decision-making by fund managers. This also makes them low-cost funds with expense ratios, reflecting fund expenses, typically lower than the mandatory upper limit of 1%. As is the case while investing in shares and ETFs, for investing in Gold ETFs too, you need a demat account.

Being listed, unlike physical gold, there is no ambiguity related to pricing for gold ETFs since issues such as gold purity and elements of selling losses such as making charges are out of the picture. When you sell off gold ETFs, you get the cash equivalent of prevailing gold prices instead of physical gold.    

Clearly, gold ETFs work for investors who seek the advantages of gold investments but without the challenges of physical gold investments. What is more, unlike physical gold investments, you can invest amounts as small as 1 gram. 

Gold Fund of Funds These are mutual funds that invest in gold ETFs and thus are also called Gold Fund of Funds (FoF). Such a fund has a fund manager who makes the investment decisions according to the scheme objectives. The returns of the gold mutual fund are likely to be close to that of the Gold ETF and the Net Asset Value (NAV) will be influenced by the movement of gold prices.

Gold ETF vs Gold Mutual Fund Investors wanting to invest in gold through mutual funds need to understand the difference between Gold ETF and Gold Fund. A Gold Fund vs Gold ETF comparison can help investors figure out which of the two options they would prefer.

Pricing This is a key difference in the Gold ETF vs Gold Mutual Fund comparison. Gold ETF prices get reflected at the stock market on real-time basis. Gold fund pricing happens through its NAV at the end of any trading day.

Investment procedure While you need a demat account to buy a Gold ETF, you can buy gold fund units directly online through the website or mobile application of the fund house, bank, or financial institution. You can also invest offline by yourself or with the help of a mutual fund distributor.

Regular investment Like other mutual fund investments, you can make small and regular investments in gold through investment in a gold fund with the help of a Systematic Investment Plan (SIP). On the other hand, there is no such facility for regular investments in Gold ETFs.

Minimum investment The minimum investment amount of 1 gram of gold for one ETF unit is higher than the minimum SIP amounts of Rs 500-1,000 depending on the mutual fund.

Expenses This is a key part in understanding Gold Fund vs Gold ETF. The expenses as expressed by expense ratio are lower for Gold ETFs, typically much lower than the 1%, the mandatory upper limit. On the other hand, gold fund of funds may have higher expenses as investors also need to account for the fund’s expense ratio as well as that of the underlying Gold ETFs in which the gold fund is investing. Further, there could be exit load condition for early exits.

Liquidity While you need to sell off gold ETFs, like shares and other ETFs, in the stock market, you need to liquidate gold fund units with the fund house based on the NAV prevailing on that day.

The gold ETFs vs gold fund comparison shows how the two mutual fund options for gold investments can individually provide distinct advantages. They not only provide two simple and convenient options to invest in gold but also help benefit from gold investments without the hassles of physical gold. 

Gold ETF vs Gold ETF Fund of Funds Summary

FAQs

Who should invest in Gold ETFs and Gold ETF Fund of Funds (FoF)?

Investments in Gold ETFs and Gold ETF Fund of Funds help investors who would like to benefit from gold investments without the common problems of purity, storage and liquidity of physical gold investments.

What are the risks in Gold ETFs and Gold ETF FoF?

These risks mostly move around gold prices which such funds track. Thus, upturns in financial markets, especially international and Indian equity markets can have an adverse impact. Further, as gold is mostly imported in India and global trade is denominated in dollars, depreciation in the dollar or appreciation of the rupee can adversely the growth of such funds.

Can you take a loan against Gold ETFs and Gold ETF FoF during emergencies? 

Depending on prevailing banking regulations and norms, banks, and Non-Banking Finance Companies (NBFCs) may offer loans against Gold ETFs and Gold ETF FoF at interest rates lower than most other loans.

Disclaimer:        

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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