scorecardresearchETF vs FOF: Which investment option is better this Akshaya Tritiya?

ETF vs FOF: Which investment option is better this Akshaya Tritiya?

Updated: 22 Apr 2023, 12:21 PM IST
TL;DR.

Gold ETFs and FoFs offer a hassle-free and cost-effective alternative to physical gold investments, providing investors with liquidity, transparency, flexibility, diversification and safety.

A gold ETF is a passive instrument that holds units representing physical gold.

A gold ETF is a passive instrument that holds units representing physical gold.

Often celebrated by investing in precious metals, especially gold, the auspicious occasion of Akshaya Tritiya is symbolic of new ventures and beginnings. Besides, precious metals also carry a deep-rooted sentimental value in Indian culture. Investing in gold has long been considered a safe haven during economic uncertainty.

However, owning physical gold can pose certain challenges. Fortunately, Gold ETFs (Exchange Traded Funds) and FoFs (Fund of Funds) offer an innovative solution, providing a hassle-free and cost-effective alternative to physical gold investments.

How do they work?

Simply put, a gold ETF is a passive instrument that holds units representing physical gold. They aim to track the price of domestic physical gold while investing in gold bullion. The price of the ETF is directly linked to the price of gold. Essentially, it means that investors can buy or sell shares of the ETF on the stock exchange just like they would with any other stock.

One gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. However, it is mandatory for an investor to open a demat/trading account to be able to invest in a gold ETF.

Investors without a demat account, may opt to gain exposure to gold via gold FoFs. Therefore, the fund manager can opt to create a portfolio consisting of his/her own mutual fund schemes or invest in schemes of other mutual fund houses, instead of directly investing in gold. The process is as simple as investing in any other FoF.

Let’s look at some of their underlying benefits:

Liquidity: One of the primary benefits of gold funds is liquidity. Unlike physical gold, which requires storage and security, gold ETFs can be easily bought and sold on the stock exchange like any other share. This provides investors with the flexibility to enter and exit the market at their convenience. Investors opting to invest via FoFs may also find it relatively easier to liquidate their investments, making them an ideal hedge during volatile times.

Transparency & Flexibility: Since gold ETFs are listed on exchanges, their net asset value (NAV) is updated on a real-time basis, providing investors with transparency on their investments. Thus, at any given point, the investor is aware about the valuation of gold ETFs in his portfolio and may transact in ETF funds any time during market hours at real-time prices. It provides a transparent, efficient and cost-effective entry and exit for the investors.

In the case of gold FoFs, one may choose to invest with an initial seed amount of as low as 100 per month through the SIP or STP route, instead of purchasing physical gold which is a high value instrument.

Diversification: A well-defined asset allocation strategy will help investors walk the tightrope between risks, rewards, and opportunities. By diversifying into gold funds, the investor is creating a portfolio that has the potential to take advantage of the various market cycles and the subsequent performance of the asset during it. Since gold has minimal co-relation to the movement of equity or debt in an investor’s portfolio, the ability of the portfolio to compound over the long term is not impacted significantly even in the face of economic headwinds.

Safety: Gold ETFs or FoFs are relatively a safer option than physical gold. In addition to the fact that it is not present in the physical form for anyone to steal it, it is also protected with the virtue of being pure gold. When one invests in physical gold, one might still be subjected to the impurity of the metal. However, in the case of gold ETFs of FoFs, the underlying investments are made in hallmarked gold, thereby reducing risk of impurity.

Investors must also take note that on the basis of the newly introduced taxation norms, starting from April 1, 2023, gold ETFs will be subject to debt funds tax treatment as they invest less than 35% in Indian equities. Furthermore, they are not required to pay STT (Securities Transaction Tax) as they are explicitly classified as non-equity products.

Gold ETFs and FoFs, therefore, have the potential to offer a convenient and innovative solution to traditional gold investments, providing investors with a wide array of benefits. Basis individual risk appetites and financial goals, investors may consider their exposure to gold by adhering to a disciplined approach and a well-diversified investment plan.

Note: Investors will be bearing the recurring expenses of the scheme in addition to the expenses of other schemes in which Fund of Funds scheme makes investment

Raghav Iyengar, Chief Business Officer, Axis AMC

 

First Published: 22 Apr 2023, 12:16 PM IST