Difference between Gold Fund and Gold ETF

For a long time now I have been hearing about the performance of DSP Blackrock World GOLD fund. I thought it is high time I shed some light on this product before people commit further funds to this product.The post will also explain the difference between Gold Fund and Gold ETF.


A gold ETF tracks the real time price of gold in the market, it is equal to holding physical gold but the difference is you don’t take the delivery of the gold in your hands. It is electronically held, which gives the benefit of easy disposal, easy liquidity and real time prices for your gold. You don’t have to pay for making charges. Nor do you have to pay wealth tax on the gold ETF. You will fall under the debt taxation category. A gold ETF is one of the smartest way of holding gold as there is no worry reagarding safe keeping of gold and the transactions can be done for huge amounts, even a leveraged position can be taken.


A gold fund tries to mimic the price of gold by buying stocks of gold mining companies. The logic is when the price of gold goes up the profits of gold mining companies will also appreciate. Which, in turn will lead to the rise in stock prices and increase in your Mutual Fund NAV. Holding a gold fund is like holding a High beta gold investment. However, investors should note that this fund carries above-average risk. While it may deliver higher returns than Gold ETFs during a gold price rally; it is also prone to correcting much more sharply, if prices fall.The theory holds good as long as the markets are in stable state, but during times like in 2008 & 2009 the stock prices in general had dipped, however good the company was the stock prices were down. Gold Funds underperformed Gold ETF's

For the Inquisitive Investor
Here are some facts that proves that a Gold Fund held in India will under perform a Gold ETF and a Gold Fund Carries itself higher risk factors than a Gold ETF.


Disadvantages of DSP BlackRock World Gold Fund
1. The Fund is affected by general Equity Market performance as the Fund buys gold mining companies stock. Gold is bought as a hedge against equity, so investing in this fund defeats the very purpose of diversification & Asset Allocation.
2. The Fund invest the proceeds into a mother fund which is based in US as there is a very limited set of companies in India. This leads to unnecessary currency risk and the fund is increasingly affected by a appreciating Rupee. 
3. The investor ends up paying higher expenses; Fund Expenses of the Indian fund+ Fund Expenses of the mother fund which is BlackRock World Gold Fund and Expenses related to Hedging. 
4. The Fund Will not benefit from Equity Taxation it falls in the Debt Taxation segment
5. Over and above this it is also affected by the price of gold. 


My point is the fund can to do well if the rupee depreciates or stock markets do well etc. but while making an investment we should consider how does the product fit into our asset allocation basket and what are the risk factors while investing into such products is there cheaper options.  


Just to prove i am not blabbering...


A ₹100,000 invested in August 2007 in DSPBlackRock World Gold Fund would have appreciated to ₹155,000 while the same amount in an Gold Exchange fund would have appreciated to ₹197000, just look at the outperformance a huge 42%. 


I am not saying investing in Gold Mining companies is a bad option but the investor needs to be aware that he is not buying gold and hence the dynamics of Investing in Gold ETf is totally different from investing in Gold mining companies. At these levels i would suggest the fund to only an aggressive investor. 

Happy Investing!!!