The convenience of gold funds over gold ETFs is finally paying off. For a long time now, we have maintained that returns on gold funds could be lower compared to gold ETFs. After all, gold funds invest in gold ETFs. But surprisingly, gold funds have been actually earning better returns, in some cases as high as 2 per cent more than the gold ETFs. This, after factoring in the expense ratio which ranges between 0.25 to 0.50 per cent.
According to Chirag Mehta, fund manager, Quantum AMC, this anomaly can be attributed to a few factors. "A gold fund gets valued at the closing price, as it is traded on the exchange, whereas the gold ETF is valued based on the London AM, which comes at 10 AM London time and the RBI reference rate which comes at noon, India time."
The closing price is the weighted average price of the last half an hour of trading when the international gold price. The Rupee rate can play a role to impact the inputs that set the NAV of the Gold ETF. Moreover, fund flows and associated market movements could also result in difference in performance of the two gold funds in consideration, according to Mehta.
Although the gold funds' gains are higher than the gold ETFs; it can pose problems to fund managers if a large number of investors decide to redeem their units. After all, the fund manager, in turn, will actually need to sell the ETFs to manage redemptions, which will not realise the same value, resulting in a drop in NAV.