How To Invest In Gold?

Arguably, gold is the only investment asset class in the world that is widely perceived to be the safe investment haven. Many investors will therefore choose to invest in this precious metal as part of their wealth preservation and creation strategy.

During last two years, when all the asset classes have failed to perform, gold is the only investment asset that has remained outperformed. As such, Gold is also widely believed to be the best hedge against the U.S. dollar and inflation. When U.S. Dollar falls, demand for gold is set to increase as investors sought to preserve their wealth. In addition, gold has a very low correlation with other asset classes like equity and debt thereby it's a very good asset to diversify for the overall portfolio.

The most direct way of investing in gold is to purchase the physical gold bullion directly from financial institutions or dealer. You can then choose to safe keep the gold yourself or the safer alternative is to keep them in a secured vault owned by third party such as banks.

Instead of holding physical gold bullion, there are a number of other forms of investment in gold without the need to hold physical stock. In Malaysia, both Maybank and Public Bank offer the convenience of gold investment account with a passbook, whereby every trade is done through the account without the involvement of physical stock. Transactions are highly liquid as the buying and selling are based on the bank's prevailing quoted buying and selling prices.

Other means of gold investment (without physical delivery) include Gold Exchange Traded Funds (ETFs), unit trusts (mutual funds) and also the choice of investing directly in gold mining companies.

Gold ETFs are open-ended mutual funds that are passively managed and they mirror the return of spot price of gold. Gold ETFs are listed and traded on stock exchanges just like stocks. As such, the cost of trading Gold ETFs is lower compared to mutual fund type of investment. Gold ETFs provide returns, which before expenses, closely correspond to the returns provided by physical gold. Each unit is approximately equal to the price of 1 gram.

Some of the most popular regional gold ETFs and mutual funds include:
- DWS Invest Gold and Precious metals Equities (listed in Singapore)
- United Gold & General Fund (listed in Singapore)
- DWS Noor Precious Metals Securities A USD (listed in Singapore)
- SPDR Gold Trust ETF (listed in U.S., Hong Kong, Singapore and Japan)

Here you are some of the gold investment vehicles available for your consideration, should you decide to get hold of one of the world's most highly sought after precious metal!

Exchange Traded Fund vs Mutual Fund (Unit Trust)

During an uptrend market like the current, you may consider to invest in an index linked security (alternatively also known as tracker fund) instead of trying to pick the right stock. An index linked security essentially links its performance according to the broad market index performance, such as Dow Jones Industrial Index or Malaysia's FBMKLCI. Locally in Malaysia, there are many index-linked unit trust funds available in the market. However, before you consider parting your money in an index-linked Fund, understand your cost of investment and consider the alternative such as ETFs (Exchange Traded Funds).



ETFs are baskets of securities that trade like stocks on an exchange and are designed to track the performance of an index. Examples are FBM KLCI ETF Fund and MyETF Dow Jones Islamic Market Malaysia Titans 25, the first Syariah compliant ETF in Asia.

Investors who want to buy an index linked unit trust fund may be better off buying the ETF which does exactly the same. The obvious benefit is that the cost of ETF is cheaper. This is because there are no management and upfront fees, unlike unit trusts.

 The upfront fees for unit trust in Malaysia on average is about 3% to 5% but could be as high as 7%!

Besides, a unit trust fund may charge up to 1.5% a year on management fee, which is much higher than the 0.5% charged by the FBM KLCI ETF.

Buying ETF is exactly the same as buying a stock, with the same lot size of 100 units. Unlike unit trust, buying and selling ETF is easy and traded real-time. Dividend is also distributed by ETFs generally on a half yearly basis.

So next time when you were to be approached by unit trust salesperson, find out about the cost of investment first. Don't let the hidden charges affect your fund performance.

Is Investing In ETF Better Than Unit Trust?

Exchange-Traded Fund or in short, ETF, is very much a mirror of unit trust fund. The key difference is that ETF can be traded just like stocks or shares in the stock exchange trading platform. The cost of ETF trading is therefore subject to the same ordinary costs of share trading, such as brokerage fee, stamp duty (may be exempted in some countries) and clearing fee. Essentially, the cost of ETF trading is also lower than investing in unit trusts, which typically attracts up-front sales charges and annual maintenance charges. With the cost of investing in ETF being lower, it is imperative that such instrument is gaining popularity, perhaps at the expense of unit trust.

For instance, in the case of Malaysia unit trust industry, it has been constantly dogged by high sales charges of between 3% to 6%, compared to other countries where the range generally starts from as low as 1%.

ETF was first introduced in the Canadian Toronto Stock Exchange in 1990 but it has since gained huge popularity in US and Europe and now Asia. ETF first started in US in 1993 and there are now over 400 ETFs traded in US and more than a thousand in the world, with total assets surging to about USD800 million! According to Morgan Stanley, average trading volume has also doubled over the last 12 months!

ETFs are essentially open-ended funds that track various index-linked equity, fixed income, commodity and even currencies. Trading of ETFs in Malaysia is relatively new, being only first introduced in 2005. The ETFs available in Malaysia are:

1. ABF Malaysian Bond Index Fund - This ETF invests in a basket of Ringgit denominated Government and quasi-Government bonds
   
2. FTSE Large 30 Index Fund - This ETF invests in a group of stocks comprising of the 30 largest companies listed in Bursa Malaysia.
   
3. Dow Jones Islamic Market Malaysia Titans 25 - This ETF is the first Syariah Exchange Traded Fund launched in Asia.
   

In a nutshell, ETFs enable investors the following benefits:
- gain broad exposure to entire stock markets of different countries with relative ease on trading and at a lower cost to unit trust;
- diversify portfolio without exposing to the risk of one individual stock;
- unlike unit trust, ETFs are highly liquid and transparent;

So, for those investors who are fed up with his or her unit trust funds' constant poor performances due to the failure of so-called "professional" fund managers, whose interests generally lean towards only beating index benchmarks, you may want to consider ETFs since you will now have better control and incur lower cost of investments.

However, do bear in mind there is no certainty in any form of investments. One will still subject to the economic, political, currency, legal or other risks inherent in a specific sector or market that affects the performance of the indexes being tracked by the ETFs.