Gold ETFs or Gold Funds: Which One Should You Choose?
By Neelima Shankar
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Managing cash

The more cash a gold fund holds in its portfolio, the more are the chances of its underperformance.  As a matter of fact, a gold fund cannot invest completely in gold. Given that the buying and selling of units from gold ETFs is limited to one kg of gold, gold funds usually hold cash till the required level of cash gets collected. This time lag can be handled by funds by purchasing from the market as soon as they receive inflows.

Penalty for premature withdrawal

If an investor wants to withdraw from a gold fund scheme before the completion of one year, an exit load is charged from him/her. An exit load can be defined as the penalty for withdrawing from the gold savings fund scheme before 365 days. Usually, exit load is charged at the rate of 1 percent for withdrawing before the completion of a year, but, some gold fund houses charge higher rates for the same. Take for example, Kotak Gold Fund from Kotak Mahindra Bank which charges 2% exit load on withdrawal before one year. However, gold ETFs do not have any such exit load charges.

Ownership of physical gold

Yet another drawback of gold funds is that depending on the fund house, investors may or may not get physical delivery of gold. Some gold fund houses which do allow physical delivery of gold, insist that investors own at least 1 kg of worth of gold ETFs. On the other hand, gold ETFs can be exchanged for as low as 10 grams of gold.

Are investments in gold funds feasible?

Gold funds are good investment avenues particularly for those investors who want to avoid the formalities of opening a demat account and a trading account. Usually, gold ETF investors overlook the costs of opening and maintaining demat accounts, which are considerable when an investor is holding small value of gold ETFs. However, gold funds score over gold ETFs in other benefits extended by them. One of these benefits is the facility of investing through the systematic investment plan (SIP) route.

Investing in gold ETFs requires a certain degree of discipline and risk taking ability that only a few small investors' posses. On the other hand, when investing in gold funds investors should make sure that they chose a fund which keeps a track of underlying gold ETFs very closely.

As is the famous saying, one cap cannot fit all heads and in this case also investors have to decide whether to go for gold ETFs or gold funds depending on their requirements and limitations.

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