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Thursday, May 5, 2011

Gold ETF vs. Gold Mutual Fund(MF)

Gold MF falls under FOF (Fund of Funds) category where AMC (Asset Management Company) invests 90-95 percent of its corpus into various gold ETFs, and rest is invested in money market instruments, short term fixed deposits and other liquid schemes.

Pro’s : ( 1) Demat and trading accounts are not required, which are necessary for buying gold ETFs.
(2) Gold MF comes with the benefit of Auto SIP (Systematic Investment Plan), while investor has to make his buying plan to simulate the Auto SIP.
(3) Like other MFs investor can buy, sell or conduct SIP/STP/SWP directly with the AMC.
(4)Investor can redeem investments on any business day directly from the AMC.
(5)Demat account charges and brokerage charges are saved, which are applicable in case of ETF.
(6) Like ETFs, no wealth tax is applicable.
(7)Taxation is similar to ETFs.
(Within 1 year)Short term capital Gain: As per slab
(After 1 year)Long term capital Gain: 10% without indexation or 20% with indexation,which ever is lower.

Cons: (1)Expense charges are more than ETFs.
(2)Performance depends on the returns of invested ETFs and short term investments. Thus higher tracking error than ETFs

For which option one should go?

Well this depends on the investor, if an investor is already having demat and trading account (for other investments like shares, bonds etc) then he should go for ETFs, as expense ratio and tracking error is lesser than gold MFs.

Gold MFs are suitable for those investors who don’t want to open demat and trading account just to start investing in gold through ETF. Thus investor’s saves demat account and broking charges.
Apart from this, they avail auto SIP facility, while ETF investors have to simulate SIP by themselves.

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