In a volatile market, when your stocks are struggling and mutual fund returns are headed south, gold exchange traded funds (ETFs) can be a safe bet. Gold ETFs have fetched eye-popping returns for investors over the past three months when all the other investment avenues have gone haywire amid uncertain global markets.

Gold ETFs, which have the yellow metal as the underlying asset for the units, are listed and traded on bourses. Every gold ETF unit represents a definite quantum of 24 carat pure gold and the price of the unit moves in tandem with the price of gold traded in any big gold merchant establishment or metal exchange.

The underlying asset is held by a mutual fund house issuing such units either in physical form or through gold receipt, which gives the right of ownership. Authorised participants can redeem the gold ETF units and demand equivalent value of actual gold at any time.

The recent surge in international gold prices has led to gold ETFs yielding 30 per cent returns over a three-month period and 40 per cent returns over a six-month period.

Five funds

There are five gold ETFs in the industry — Gold Benchmark ETF, UTI Gold ETF, Kotak Gold ETF, Reliance Gold ETF and the recent Quantum Gold ETF. All these ETFs, except Quantum, have given returns in the range of 26-30 per cent over the past three months. Benchmark was the first asset management company to introduce gold ETFs in India last year, followed by UTI, Reliance and Kotak.

“Our asset and investor base have grown 30-40 per cent over the last one year. Over the past couple of months, the number of customers for gold ETFs have increased about 10 per cent, and we now have about 23,000 investors. On a long-term basis, 5-10 per cent of every investor’s portfolio should comprise gold ETF,” said Rajan Mehta, executive director of Benchmark AMC.

Interestingly, the hike in gold prices has positioned DSP Merrill Lynch World Gold Fund as the only equity fund in India with positive returns in the past three months. Investors and analysts had expressed doubt about this fund when it was launched in August 2007, since it invests over 90 per cent of its assets in companies engaged in gold mining.

The feeder fund, which invests in Merrill Lynch International Investment Funds — World Gold Fund, has wooed investors with about 63 per cent returns in just six months.

The fund’s asset under management has more than doubled to over Rs 1,487 crore in December 2007 from Rs 692 crore in September 2007.

Analysts wary

Analysts, however, are apprehensive about the momentum gold has gained over the past few months.

“The returns from gold ETFs depend on the price cycles. These funds may not be able to sustain their growth if gold prices cool down. Investors can keep 5-10 per cent of their assets in these ETFs,” Dhirendra Kumar, CEO of Value Research Online, said.

Although the total asset under management of gold ETFs stood at Rs 493 crore at the end of February, the recent success of gold ETFs and DSPML World Gold Fund could transform gold-linked funds into attractive investment vehicles.

Cost factor

Investing in gold ETFs tends to be costlier during the new fund offer (NFO) period.

For instance, the Gold Benchmark Exchange Traded Scheme, which was launched in February 2007, charged an entry load of 1.5 per cent and UTI Gold Exchange Traded Fund, launched in March 2007, charged 2.5 per cent. Investors can look for opportunities in these funds when they are listed on bourses to avoid the entry load in the NFO period.

Although investors are not required to pay an entry load while investing in listed gold ETFs, they have to pay a brokerage fee. Brokerage charges are similar to what is charged while investing in stocks — around 0.5 per cent of the transaction value. However, the charge varies from one broker to another.

A pre-requisite for investing in gold ETF is to have a demat and trading account with a broker. To maintain these accounts, investors have to pay annual charges. There is also the expense ratio, a recurring expense, attached with the fund. Both Gold BeES and UTI Gold ETF have an annual expense ratio of 1 per cent.

The annual expenses such as storage, insurance, and management fees are charged by selling a small amount of gold represented by a certificate. The amount of gold in each certificate will gradually decline over time. Investors need to consider these charges before investing.