Gold Exchange Traded Funds are a relatively new concept in the Indian mutual fund industry; the first Gold ETF was launched in February 2007. Being ETFs, these funds are listed and traded on the stock exchange i.e. investors can buy and sell them like any other stock on the stock exchange, on a real- time basis. Hence, Gold ETFs offer a rather unique investment opportunity to investors who wish to invest in gold.

In their short history, Gold ETFs have been quite successful in capturing investors' fancy. It must be noted that while ETFs as investment avenues may not be very popular among investors, it is the Gold ETFs segment wherein the interest is palpable. The fact remains that Gold ETFs are like any other investment avenues and have their fair share of pros and cons. This in turn highlights the need for investors to properly evaluate the Gold ETF option and to ascertain if ETFs fit into their portfolios.

Presently, investors, who want to invest in gold, can do so in two ways. The first option is to buy physical gold (the conventional way), and the second option is to invest in a Gold ETF. Investors should select the option that best suits them. In this note, we discuss some aspects that investors must consider before choosing between a Gold ETF and physical gold.

1 Investing in Gold ETFs

a) Don't invest in Gold ETFs during the new fund offer period

Investing in Gold ETFs tends to be 'expensive' during the NFO period and this has been substantiated by the launches we have seen so far. For example, at the NFO stage, Gold Benchmark Exchange Traded Scheme (Gold BeES), launched in February 2007, charged an entry load of 1.50 per cent; UTI Gold Exchange Traded Fund, launched in March 2007, charged an entry load of 2.50 per cent. In our view investors will be better off avoiding funds, which charge an entry load during the NFO period. Instead they can invest in these funds when they are listed on the stock exchange and thereby avoid bearing the entry load.

Although, investors do not have to pay entry load while investing in listed Gold ETFs, they do have to pay a brokerage to the broker. On inquiring with several brokers, we learnt that the brokerage charged for investing in Gold ETFs is that would have been charged for making a stock investment i.e. approximately 0.50 per cent of the transaction value. However, the same does vary from broker to broker.

b) Gold ETFs are not free of cost on an ongoing basis

After the NFO period, when Gold ETFs are listed on a stock exchange, investors can invest therein through a Sebi (Securities and Exchange Board of India) registered stock broker. A pre-requisite for investing in Gold ETF is to have demat and trading account with a broker. To maintain these accounts, investors have to pay annual charges, which vary depending on the broker that the investor is associated with. And then there is also the expense ratio (i.e. a recurring expense) attached with the fund. Investors need to consider these charges before investing in Gold ETF. At present both, Gold BeES and UTI Gold ETF, have an annual expense ratio of 1.00 per cent.

2. Buying physical gold

This is the traditional way to invest in gold. For investors who have a bank locker, they must consider investing in physical gold. Having access to a bank locker means they don't have to worry about where to store the physical gold. Furthermore, an existing bank locker would mean that investors are not required to paying any additional recurring expenses.

Of course, we urge investors to ensure that they should exercise caution if they intend to buy gold from a bank.