Gold is definitely a good asset class to invest in. For small investors taking exposure to gold can be a good way to diversify from the economic and financial uncertainties. However, the best way to invest is via ETFs which are highly liquid, have transparent pricing and helps in portfolio rebalancing.
Most financial advisers always give priority to equity investments and debt to an extent and restrict gold to just 5% or at the most 10% of the portfolio. This is quite disappointing when history has shown that gold has delivered decent returns in the medium to long term. In the last one year gold ETFs have delivered 18% returns while Nifty has returned just 1.7% (Source: Value Research – 17 June, 2011).
This is not to prove that Gold is better than Equity. Further, I’m not trying to encourage people to invest more in Gold than Equity. I believe that every asset class has its own benefits and pitfalls that investors should be aware of.
Criteria for choosing best Gold ETF
Let us now look at how one can go about choosing the best Gold ETF. Some of the criteria are discussed below:-
1. Fund Track Record
The best advice here is to avoid new fund offers and recent launches. Choose a fund which has a track record of atleast 3 years. It is also important to know the experience of the fund house in ETFs. Some fund houses such as Benchmark Mutual Fund, Quantum Mutual Fund and Kotak have been in the ETF space since 2007 so these can be relied on. Although funds launched within the last 3 years are not bad as such they need to prove themselves to be picked.
However, most Gold ETFs have similar performance in terms of returns, because they are passive in nature. Most established Gold ETFs have expense ratios of close to 1%, while new funds may have higher expense ratio. You don’t have to worry about researching Gold ETFs because most of them will exhibit similar performance because they invest in the same asset class passively.
2. Type of Funds
I am diverting from ETFs to an extent here. Be careful to restrict your choice only to ETFs. There are other gold funds such as international gold funds or fund of funds (FoFs). These invest in global gold funds or other domestic gold funds. There are a few FoFs which invest a majority of their funds in Gold ETFs and remaining in debt instruments. These are not ETFs but funds which invest in ETFs.
For example Kotak Gold Fund of Fund invests about 96% of its corpus in Kotak Gold ETF and other debt instruments. Similarly Quantum Gold invests in Quantum Gold ETF plus a few other instruments.
The advantage of investing in FoFs is the ability to opt for SIP. But the drawback is an exit load which is charged on withdrawals within a year. Similarly the exposure to other instruments can make the returns from these funds deviate slightly from pure Gold ETFs, which closely track gold prices. However, I can confidently say that international gold funds can be avoided altogether. Please read Gold ETF vs Gold Mutual Fund
3. Trading Volumes & Liquidity
The obvious question here is why bother about volumes when one is investing for medium to long term. True it is not important, but it is important considering the price and liquidity factors. Funds which have low trading volumes are good to avoid, because when you want to sell out later it can be difficult to find significant amount of buyers.
For example there are a few gold ETFs where the volumes are less than a 1000 grams (or units) per day which can be avoided
(See: http://www.nseindia.com/content/gold_etf_sparks.htm# for more details on this)
But beware this is just one day’s data, the trading volumes must be consistent for a month or longer periods.
Gold Bees, Kotak Gold and Gold Share are good picks that have good volumes and participation.
Higher participation means the prices would also be reasonable. Funds which have low liquidity have a huge gap between buyer and seller quotes which makes it difficult to transact.
3. Ticket Size is not a factor to consider
All gold ETFs are designed in such a way that each unit represents one gram of gold. However, there is one exception which is Quantum Gold ETF, where one unit corresponds to half a gram of gold. For example one unit of Quantum Gold is at Rs.1077.67 while unit gram of Kotak Gold ETF is worth Rs.2165.88. This does not impact the performance. When gold prices go up by 10% both funds would deliver similar returns and this will not affect investment performance.
Short listing the best Gold ETFs
Let us just try to implement the above criteria to see which ones pass our criteria.
1. Fund Tenure > 3 years
The Gold ETFs which meet the criteria include:-
- Gold Bees (Benchmark MF)
- Kotak Gold (Kotak MF)
- Quantum Gold (Quantum MF)
- Reliance Gold (Reliance MF) &
- UTI Gold or Gold Share (UTI MF)
Analyzing volumes over a period of time can be a little rigorous and time consuming, but based on my knowledge Gold Bees, Kotak Gold and Gold Share have large volumes and trade frequently. Quantum Gold has been there for more than 3 years, but its volumes are lesser than the above three players. If we observe the recent volumes Gold Bees, Kotak Gold and Gold Share are the top ETFs.
But be cautious because sometimes one or more ETFs can show a blip or spike on a single day or few days which can be misleading at times. For people who are planning to invest I would recommend you to first watch a couple of Gold ETFs which are high volumes for a few weeks before you invest.
If you still want to check returns I can show a comparison, but most funds have similar returns.
Once the track record and volumes are established the choice of funds is clear. But if you still want to check returns or performance the comparison is shown below: -
|Fund Name||1 year return||3 year returns (p.a.)|
|Kotak Gold ETF||17.93%||20.84%|
|Gold Share (UTI Gold)||17.96%||20.88%|
Note: The yellow shaded funds are not in the shortlist, but just shown for comparison.
The lesson here is all the three ETFs have similar returns. Further, the funds which did not make the shortlist also delivered similar returns. So a small error in fund selection will not burn your portfolio in any case.
Why Quantum Gold and Reliance Gold are not chosen?
The only issue with Quantum Gold and Reliance Gold is the lower liquidity and volumes, which can impact you when you want to buy or sell large quantities. For instance if you want to sell 60 units of Quantum Gold (i.e. 30 grams – 0.5 X 60) it can take a lot of time for you to sell at a given price because the total trading volume in a day is just 600 units or around that level. So basically if you are selling about 10% of the market volumes there will be few buyer or demand to absorb the same. So if you are in urgent need of funds you may end up selling at lower rates given the panic caused by the urgency for funds. For people who want to invest for shorter periods liquidity can be disappointing in these ETFs but this is not an issue with top Gold ETFs such as Gold Bees.
Research Time and Energy Saved
Unlike equity funds you don’t have to do a detailed research of the investment objectives, portfolio management, portfolio changes, historical returns, expense ratios, etc. All ETFs including Gold ETFs are passive and have a similar fund structure, returns, expenses and framework. So the differences are only in terms of experience, track record and to some extent volumes. Many firms publish a lot of data and analytics on equity funds and rate funds based their performance.
In case of Gold ETFs you don’t have to go through all the fluffy research, monitor NAVs from time to time or see if the portfolio manager changes his strategy. You don’t even have to worry about the portfolio holdings because it is all invested in pure gold and priced based on international gold prices.
I would not recommend you to time the purchase or sale expecting a gain, because gold prices are highly volatile and unpredictable. But before you buy just ensure that you are not buying based on some hype or seasonal news which is common during Akshaya Tritiya and Deepavali season. Try to avoid buying on these occasions, but if you have a sentiment or tradition of buying just restrict to a few units as a token for the occasion.
The best time to buy is during off-season times when people don’t really talk about gold. In those times when gold prices are also not showing bullish trends gradually start buying a few grams and accumulate over time. Don’t try to buy in one shot or invest lump sums, instead buy in small quantities and accumulate. This strategy is as simple as an SIP or regular savings in a piggy bank whenever you have some surplus funds.
Remember that Gold is a good shield against inflation and can have a steady purchasing power over a long period of time. So don’t wait for another auspicious time to invest in Gold, instead start observing a few ETFs for a week or two and take the plunge. The yellow metal has been a safe heaven during economic crisis of 2008 and has delivered good returns in the last 3 years. Investing in gold does not require super intelligence, research skills or great experience. You just need some common sense and patience to reap decent returns. So what are you waiting for?