This article gives you a low down on how to buy Gold Exchange Traded Funds (ETFs) and gold mutual funds.
DIFFERENT ASSET CLASSES
The basic difference between gold ETFs and gold mutual funds are that they belong to two different asset classes. Gold ETFs give the investor the opportunity to invest in units of gold, which are then traded on the exchange as a single stock. The units issued under the scheme represent the value of gold held in the scheme. Gold ETFs hence fall into the category of commodities.
Gold mutual funds, however, fall into the equity category as they invest in equity and equity-related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.
RETURNS AVAILABLE
The predominant criterion for all investment remains the returns that can be expected from these funds. An investor should expect a return of around 15% per annum over a two to three-year time horizon. The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008. The gold fund they invest into has given an annualised return of 29.5% over the last three years. However, most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15% of your assets must be invested in gold.
NATURE OF FUNDS
There is also a strict difference with the regard to the aims of this fund and how they are managed.
Gold ETFs are known to follow a passive investment strategy. The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity. However, when choosing between ETFs, investors need to be aware of the tracking error, which is the difference given by the gold ETF and those given by physical gold.
In fact, when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies. The fund manager has an understanding of the quality of gold reserves to mined and will be able to decide which companies will do better than others.
THE MULTIPLIER EFFECT
The reason most gold mutual funds give for choosing a mutual fund is that stock prices of gold mining companies have risen much more than the price of gold itself. The GDM index, an index of gold miners, has moved up close to 6.5 times since 2000 as compared to a gold price increase of over three times in the same period. There is a multiplier effect on the profitability of gold mining companies with the rise in gold prices, on account on operating leverage.
COST BENEFITS
ETFs give investors the opportunity of buying as less as 1 unit on the exchange. Since investors can enter the trade through brokers, there is no entry or exit load and brokerage expenses are not very high. This is favourable in comparison to mutual funds, which have a defined load structure, entry and exit loads and other expenses. However, things like minimum unit size vary for investors who invest in ETF via asset management companies.
THE TRADING EDGE
The advantages of holding ETFs are seen during trading, given that ETF units can be traded like shares. It gives the investor the ability to buy and sell quickly at market price, making them highly liquid assets. Moreover, intra-day trading is also possible with an ETF, which is not possible with open-ended mutual funds. Moreover, portfolio disclosures occur only once a month in a mutual fund but everyday in an ETF.
