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Sunday 28 April 2013

Gold ETFs Vs Gold funds

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Gold ETFs are funds that invest in physical gold of 99.5 per cent purity. A gold ETF invests 90-100 per cent in physical gold sourced from the RBI approved banks and 0-10 per cent in debt instruments. It is for this reason that Gold ETF returns are mostly in line with the prices of physical gold.

 

The minimum that you can buy in ETFs, is gold worth at least one unit, which is equivalent to one gram of physical gold, with the exception of Quantum AMC, which offers half a gram option for each unit. The units of gold ETFs are traded in exchanges and hence offer liquidity and the right price for both buyers and sellers. However, this liquidity varies across fund houses, which makes liquidity an important factor when investing in a gold ETF.

 

On the other hand, a gold fund is an open-ended fund that invests in a gold ETF. For an investor, buying a gold fund is easier because you don't need a demat account, which is required to invest in a gold ETF. However, this convenience comes at a slightly higher cost in the form of annual expenses of about 1.5 per cent of the asset under management, whereas it is around one per cent in case of gold ETFs. Investors in gold funds can invest through the SIP route, which is not possible when investing in the ETF. However, both these forms of investments in gold track the price of gold and have similar returns and little to choose from other than liquidity in case of ETFs.

 

As for converting gold ETFs to physical gold, most ETFs allow investors to convert only a minimum of one kg of physical gold, except Motilal Oswal's MOSt Gold shares which allows investors to redeem units for a minimum of 10 grams of gold.

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