Exchange Traded Funds (EFT's)

There have been several developments in the mutual fund (MF) arena of late. MF houses have also introduced a variety of schemes to cater to the needs of different investors.

One such product is gold exchange-traded funds (ETFs). As these schemes get listed on the exchange in coming days and start trading, investors need to have a clear strategy of how to invest in them.

Gold ETFs have the basic characteristics of MFs but they are traded like stocks on the bourses.
This means that the fund is available for investment on the stock exchange and it can be bought and sold like a normal stock.

The ETF is normally linked to an index so that it mirrors the performance of the index and this usually makes it a passive fund. A passive fund is where the fund manager does not take decisions about the composition of the portfolio but makes the investment according to the stated guidelines.

In a gold ETF, the fund’s performance depends upon the price movement of gold. Hence, the movement in the value of the fund depends upon the movement in the gold price. This makes it a useful tool for those who want to consider gold as an investment option and gain from its price movements. Here, investors do not actually accumulate gold.

In case investors require gold, they have to sell the units from the fund and buy physical gold from the market. Once the gold units get listed, there has to be some strategy with regard to investment in such schemes. The first principle that investors should follow is that they must try to get a significant appreciation when they quote at a higher price. As the price of gold increases, the price of the funds will also rise and vice versa.