I wanted to know what gold mutual funds and gold ETFs mean. Are they better than some of the other funds available in the markets?
-Anand
Gold ETFs are fairly straight forward to understand. The money that you invest in them gets invested in gold. The value of a gold ETF moves exactly in line with the price of gold, less 1 per cent, which is typically the annual expense. So if the price of gold goes up by 10 per cent in a year, a gold ETF will give you 9 per cent. In the same way, if the price of gold goes down by 10 per cent, the value of your gold ETF will go down by 11 per cent. To invest in a gold ETF, you will need a demat account.
Gold funds are another set of funds that have been launched in recent times. You don’t need a demat account to invest in these gold funds. What these funds do is that they invest your money in gold ETFs, because of which they cost 50 basis points more on an annual basis. So where gold ETFs cost 1 per cent, these gold funds cost 1.5 per cent.
Are gold funds better or not? Well, we think gold has become a speculative investment. Going by the level that gold has attained, and what we have seen over the past 5-7 years, there is a possibility that gold might continue its momentum and appreciate for a while. But at the same time, it can be very volatile, and might even fall sharply in value. Hence, when you invest in gold, you're basically taking a bet on it. You need to have a very clear reference when investing in gold; you need to have your stop-losses in place.
This article was originally published on March 13, 2012.
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