Traditionally, Indians have always believed in investing in gold and considering the recent surge in gold prices, adding the precious metal in your portfolio could be a good idea.
Investing in gold protects one's money against a political or economic change that easily affects other instruments like equity.
Moreover, making an investment in the metal need not be limited to the physical form. There are many ways to bet on gold in the paper form as well. One of the ways to do it is through mutual funds that are dedicated to investing in gold. These gold mutual funds mainly come in two forms: gold ETFs and gold savings fund.
What are Gold ETFs?
An ETF (exchange traded fund) is a security or financial instrument that tracks a certain index, bond, commodity or a basket of assets. Gold ETF, just as the name suggests, are pools of funds that track the value of bullion gold on the stock market (Spot Gold).
With the price performance being reflective of physical gold, the returns from the mutual fund will be same or similar to that of Spot Gold before scheme expenses and tracking errors.
The expense ratios on these funds are lower as these are passively managed. This is because the job of the fund manager here just to buy the metal and keep it with the scheme's custodian. It is not actively managed like an equity-linked mutual fund.
Purchasing gold ETFs
Before you purchase a gold ETF, consider the following:
- These are safe as they allow you to own the metal without having to worry about its storage. You will need a demat account to purchase gold ETFs as these are bought and sold at the stock exchanges.
- Through a brokerage house, you can buy or sell these at any point on a trading day and during business days.
- These are priced at the rate of gold at its purest form possible, leaving no purity concerns at the time of sale, like in the case of physical gold.
- You can also use these gold ETFs as collateral to borrow money from a bank.
What are gold savings fund?
If you do not have the time or the interest in tracking gold prices in order to make decisions on when to buy or sell, gold savings fund may be the option for you.
Additionally, these schemes allow you to make investments towards the metal at regular intervals just like SIPs (systematic investment plans) of equity mutual funds.
Through a gold savings fund, the investor can buy a gold worth a certain amount every month or quarter (according to the plan). This eliminates the need to purchase a certain number of units of gold (as in the case of ETFs) and instead purchase it for a desired amount (through fixed installments paid towards the plan).
Purchasing a gold savings fund
You can start a gold savings fund with any of the popular mutual fund houses.
The expense ratios on these are higher than ETFs as they allow you the leisure of investing without a demat account and having to track the investment.
Further, it allows you to invest in gold periodically like you would do in a savings scheme rather than making a lump sum investment.
Both methods have their drawbacks and advantages. Ultimately, it is the price of gold in the stock markets (spot gold) that will affect your returns.
Besides that, you need to look at the cost aspects. While ETF has a lower expense ratio, you will have to bear the cost of demat and brokerage transaction charges. On the other hand, gold savings funds come with higher expense ratios.