wish to invest in gold ETF and want to know the difference between gold ETF and

gold funds, which one is better? Can gold ETF be converted into physical gold at
any given point of time? Which one is the best gold ETF?
- Jay Prakash

Gold ETFs are funds that invest in physical gold of 99.5 per cent purity. A gold
ETF invests 90-100 per cent in physical gold sourced from the RBI approved banks
and 0-10 per cent in debt instruments. It is for this reason that Gold ETF returns
are mostly in line with the prices of physical gold.

The minimum that you can buy in ETFs, is gold worth at least one unit, which is
equivalent to one gram of physical gold, with the exception of Quantum AMC, which
offers half a gram option for each unit. The units of gold ETFs are traded in
exchanges and hence offer liquidity and the right price for both buyers and
sellers. However, this liquidity varies across fund houses, which makes liquidity
an important factor when investing in a gold ETF.

On the other hand, a gold fund is an open-ended fund that invests in a gold ETF.
For an investor, buying a gold fund is easier because you don't need a demat
account, which is required to invest in a gold ETF. However, this convenience comes
at a slightly higher cost in the form of annual expenses of about 1.5 per cent of
the asset under management, whereas it is around one per cent in case of gold ETFs.
Investors in gold funds can invest through the SIP route, which is not possible
when investing in the ETF. However, both these forms of investments in gold track
the price of gold and have similar returns and little to choose from other than
liquidity in case of ETFs.

As for converting gold ETFs to physical gold, most ETFs allow investors to convert
only a minimum of one kg of physical gold, except Motilal Oswal's MOSt Gold shares
which allows investors to redeem units for a minimum of 10 grams of gold.