What is Gold ETF FoF? – Understanding the Role of Gold ETF FoFs in Modern Investing

A gold ETF FoF is a type of mutual fund that invests in one or more gold exchange traded funds. These ETFs, in turn, hold physical gold of 99.5% purity or higher, ensuring that the fund’s value closely follows the market price of gold.

Unlike directly buying a gold ETF, where you need a Demat account, a gold ETF fund of fund can be bought and sold like any other mutual fund. This makes it accessible for investors who prefer the simplicity of traditional mutual fund investing.

In short, it’s an indirect yet convenient way to buy gold ETF exposure without holding the underlying units yourself.

Here’s how it functions:

1. You invest in a gold ETF FoF through a mutual fund platform.

2. The FoF then allocates your money into underlying gold ETFs.

3. These gold exchange traded funds invest directly in physical gold stored in secure vaults.

The fund’s Net Asset Value (NAV) moves in line with the domestic price of gold subject to expenses of the FOF scheme and ETF scheme in which FOF makes investment. You can redeem your investment anytime through the AMC, just like any mutual fund.

In modern investing, gold ETF FoFs play an important role in building balanced, resilient portfolios. Traditional portfolios often rely heavily on equities and debt instruments. However, adding gold mutual funds or gold ETF FoFs introduces a layer of diversification that may help manage market volatility.

Here’s how they fit into today’s financial landscape:

1. Portfolio Diversification

   A diversified portfolio can help better cushion potential losses, since fall in one asset class may be balanced by the rise in another. Gold may move differently from equity and debt markets. When stock markets fall, gold may help to reduce the overall volatility of your portfolio. However, at times Gold may also move in line with other asset classes depending upon market factors.

   Investing in gold ETF FoFs let you gain gold exposure without holding physical assets. This diversification may help cushion potential losses in your portfolio better. 
    

2. Hedge against Inflation  

   Inflationary pressures can result in the loss of the real value of your investments in fixed income instruments like FDs. But gold may act as a hedge against inflationary that can help protect the real value of your money. 

   A gold ETF FoF helps you keep your investment linked to an asset that may hold its value in inflationary periods.
    

3. Crisis-Resilient Asset

   Stock markets may fluctuate rapidly during times of economic or geopolitical tensions. Gold may show potential resilience in times of such uncertainties. This means gold-based mutual funds may also be more resilient in these times. However, at times Gold may not show resilience depending upon market factors.

   Therefore, including a gold ETF fund of fund in your portfolio may help balance the impact of market downturns.
    

4. No Storage Hassles

   Unlike physical gold, a gold ETF FoF is entirely paperless. You can invest, track, and redeem your holdings online without dealing with locker fees, making charges, or security concerns about holding gold at home. 

   In fact, you don’t need a Demat account either when investing in Gold ETF FoFs. That said, the fund does charge an expense ratio to cover administration and management costs.
    

5. Option of Small Contributions with SIPs

   Buying physical gold, especially when prices are high can be a challenge for most retail investors. Gold ETF FoFs allow you to start investing in gold gradually through SIPs with a nominal contribution of just INR 500 or even less depending upon each Fund House. 

   This helps you build gold mutual fund exposure gradually instead of making a large one-time investment and takes advantage of rupee cost averaging where you average out the investment cost over time.

    

Here are the main features that make gold ETF fund of funds stand out:

• Indirect Exposure to Gold: The FoF invests in gold ETFs that hold physical gold of 99.5% purity or higher.

• Ease of Investment: Can be purchased directly through mutual fund platforms without the need for a Demat account.

• Liquidity: Units can be redeemed through the AMC, providing easy access to funds.

• Transparency: The NAV reflects daily gold price movements, allowing investors to track performance easily.

• SIP Flexibility: Investors can start small, with daily, weekly or monthly SIP plans, to build gold exposure gradually.

   

Investing in gold ETF FoFs can offer several practical advantages for investors:

1. Diversification: Including gold in your portfolio aims to balance risks from equity and debt investments.

2. Inflation Hedge: Gold  may maintain value when inflation erodes currency strength.

3. Convenience and Safety: No need to store or insure physical gold, as all holdings are maintained in electronic form.

4. Accessibility: You can start investing with small amounts starting from Rs.              

5. Professional Management: Fund managers handle asset allocation as per SEBI-regulations and Offer documents and ensure transparency.

    

Before investing in a gold ETF fund of fund, it’s important to understand a few key considerations:

• Price Fluctuation: Gold prices can move based on global supply-demand dynamics and currency changes.

• Expense Ratio: Since the FoF invests in gold ETFs, there are two levels of costs—at the FoF and ETF levels. 

Note : Investors are requested to note that they will be bearing the recurring expenses of the fund of funds scheme, in addition to the expenses of underlying scheme in which the fund of funds scheme makes investments.

• Taxation: Capital gains made from selling gold ETF fund of funds units after 12 months will be taxed at 12.5% without indexation benefits. 

• Investment Horizon: These funds work best for long -term goals  or as a diversification component.

• Tracking Error: There  can be a small difference between fund returns and the actual movement of gold prices due to tracking error & other scheme related expenses

   

Gold ETF FoFs may be suitable for:

• Investors who wish to buy gold ETF units indirectly through a mutual fund.

• Individuals without a Demat account who still want digital gold exposure.

• Those seeking portfolio diversification with gold mutual funds.

• Investors planning systematic investment plans (SIPs) to build gold exposure over time.

   

Gold ETF vs Gold ETF FoF vs Physical Gold

Here’s how you can invest in gold ETF fund of funds:

1. Choose a SEBI-registered AMC offering a gold ETF fund of fund.

2. Read the scheme information document to understand its objective and costs.

3. Complete KYC requirements online or through a distributor.

4. Invest via lump sum or SIP—whichever suits your goal.

5. Monitor fund performance periodically through the AMC website or mutual fund platform.

    

Gold ETF FoFs bring a traditional asset like gold into the modern world of digital investing. They offer the convenience of mutual funds while giving you exposure to the value.

Although not risk-free, these funds  may help you maintain balance across relative stability, liquidity, and diversification. For investors who want to participate in gold ETF investments without worrying about Demat accounts or physical storage, gold ETF FoFs can be a practical way to add gold to your long-term investment plan.

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 

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• This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.