Gold ETF or Gold Savings Fund, which gives you better returns?

Investing in gold ETFs and gold savings funds look better than buying hard gold these days. Which one should you invest in, gold ETFs or gold savings funds? Which gives better returns? Learn the differences between gold ETFs and gold savings funds, and see which is better.

Investing in gold ETFs and gold savings funds are currently pushing the purchase of hard gold in coins and bullions out of fashion for various reasons. Banks won't buy back gold coins or bullions, and selling your gold to local jewellers is often troublesome. With the gold price steadily coming down for some five-six months, buying coins or bullions is also a bit risky. A smarter option is to go for SIPs in gold funds, or buy gold ETF. Now the confusion is, which one should you go for?

Beginning investors often ask very silly questions, enquiring about the best investment instruments. Thus, questions like whether gold ETF or gold savings fund which is better, bank FDs or debt funds which is better and so on, often come swarming in. My simple answer is, all investment instruments are good in their own place, having their own merits and demerits. Had they not been good enough, they won't have survived in a highly competitive market. A smarter question to ask is, which one is better for you. Yes, I have put emphasis on you because you as the investor must decide few important factors like time horizons, risk profiles, expected returns, purpose of investment and so on. Generalized conclusions do not help much. We cannot simply conclude that gold ETF is better than gold savings funds, or vice versa, without considering the advantages and disadvantages of both the products. In this case, therefore, a better approach is to understand the differences between gold ETFs and gold savings funds, and find out which suits your needs better.

What exactly Gold ETF and Gold Savings Funds are?

As a part of business strategies, fund houses often conceal a few facts in their terms and conditions, finding which is often a treasure hunt. There is nothing wrong in it for them, but as a knowledgeable investor you should be aware of them. (How many times have you actually paid attention to the famous statutory warning that mutual fund investments are subject to market risks?) Just today after reading my comparison between investing in gold and gold funds, a friend called me up enthusiastically and wanted to invest in gold ETFs pretty soon. To his wonder, he didn't know that you need a demat account for that. You don't have SIP plans either. Did you know that?

Also, almost all gold savings funds trade their gold ETFs. For example, Reliance Gold Saving Fund invest in Reliance Gold Exchange Traded Fund. Subsequently, the return of a gold saving fund should always be lower than a gold ETF. So, are gold ETFs better than Gold fund of funds? Wait, you are hurrying again. It's theory time!

Differences between Gold Saving Funds and Gold ETFs

Gold Exchange Traded Funds (ETFs), as clearly evident from the name, are like stocks and they trade in the exchange. They invest in physical gold and follows the daily gold prices. To deal gold electronically, you need to pay some charges too to make up the expenses. As mentioned earlier, a demat account is required to invest in Gold ETFs. Also, SIP options in gold ETFs are not available.

Difference between Gold Savings Funds and Gold Exchange Traded Funds (ETF)

Gold Savings Funds, on the other hand, are like mutual funds which invest in their respective gold ETFs. The expense ratio is higher because they are, borrowing Aristotle's words, twice removed from reality. In case of gold ETFs, you just bear the charge of running the ETF. In case of Gold Savings Funds, you need to bear the charge of running the ETF plus charge of running the MF. The exit loads are higher too. However, often gold savings funds are less volatile because of two reasons. In gold ETFs, you need to time the market, whereas gold savings funds have SIPs and can adjust the volatility by rupee cost averaging. Secondly, some fund of funds invest small portions in short term debts and similar asset classes which are less risky.

Gold funds, however, have lesser return potentials than gold ETFs. The reasons should be clear by now: you need to pay management charges twice, you are less subject to market risk because of SIP but the same decreases return potential as well, and the short term debts or money market instruments that the gold savings funds invest in do not give higher returns like equity or commodities.

So, it is time for the final verdict. Gold ETF or Gold Savings Funds (FoF), which one is better for you?

Who should invest in gold ETF?

If you have a demat account (or can open one), and can invest systematically into gold ETFs every month, and can take a little risk, you should invest in gold ETFs. You will be benefited from comparatively lower expense ratio and higher return potentials. The expense ratio of gold ETFs is usually 1%. Clearly, old ETFs are better than gold funds, if you can manage it yourself.

Who should invest in gold savings funds?

If you do not have or do not want to open a demat account, do not want to trade in the market directly and face greater risks, and be happy with your account auto credited by SIPs every month, go for these fund of funds. However, due to debt instruments and higher expense ratio (0.5% for the fund itself, added to 1% for the ETF which it trades in), your returns will be comparatively less. In longer time horizons, these higher expenses can devour a sizeable portion of your gross return. Still, I feel it is better to invest in gold savings funds than gold ETFs for new investors. As you mature in experience, your portfolio should contain more ETFs than FoFs.

Will you invest in Gold ETFs of Gold Savings Funds? Let us know by posting a comment below!

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