Spot the difference

shailesh agarwal (professional accountant)   (7642 Points)

14 March 2009  


Spot the difference between gold ETF and gold fund
Arnav Pandya


Arnav PandyaArnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.

There are different investment options available for investors in order to gain from specific trends. One area that has opened up for them in the last few years has been the gold route, whereby they can make use of the opportunities available in the gold arena for the purpose of their asset selection. 

Mutual funds have emerged as a popular route of investing in gold. Many investors do not distinguish between the different types of funds that are present in the Market and often end up making poor investment decisions. Here are some points that need to be considered while looking at gold funds. 

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Fund management style has implications for investors

Gold ETF

A new entrant in the Market has been the category of Exchange Traded Funds (ETF). These are schemes that have the features of both mutual funds as well as stocks and are listed on the stock exchange. The investor can buy and sell units in these schemes as per their convenience on the stock exchange, just like they do with stocks.

An important feature of gold ETF is that they track the gold prices live. This is suitable for investors who want to use gold as an investment option. By buying a gold ETF, the investor takes a position on the price of the gold as the price of the ETF is directly linked to the price of gold prevailing in the market.

There are a lot of gold ETFs present in the Indian Market and the performance of these schemes will be similar, as all of them track the same asset. Due to this reason, the investor should be buying ETFs when they feel that the price of gold will rise from the current level.

The idea here is that the investor will buy the fund at a lower level and then sell it when the price of gold moves up, taking up the ETF price along with it.

Special: Gold rates 

Gold funds

There is also another option that is available from mutual funds and they are gold mutual funds. These are separate from the gold ETF and hence the analysis of these schemes also has to be done differently by the investors. These are equity-oriented schemes as they invest in the stock of companies that are listed on the stock exchanges across the world.

In terms of investment, the money is invested in companies belonging to gold sector. This covers usually those companies that are involved in the gold mining area and hence the movement or the returns of this fund will depend upon the movement of the companies on the stock exchange. The base for these schemes is different and hence they have to be analysed separately.

Unlike a gold ETF, which shows a direct relationship with the price of gold, the same might not be witnessed here. The scheme will show some gains when the gold companies record higher profits and gains. 

Usually, there is a larger gain coming in for the gold companies when the prices go higher as they are able to post better results. There is, however, some time lag with which these conditions are witnessed.

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Difference matters

This basic difference between a gold ETF and a gold fund has to be understood before making a choice between the various funds available for investment. When this is made, the investor will be able to ensure that the investment is able to achieve the objective that was set when the money was invested. 

This will also help in tracking the investment properly. At the same time, there is also the question of benefiting from various moves present in theMarket and this can be done effectively when the investor knows what they are investing in.