MUMBAI: The feverish charge for the yellow metal is now unfolding across corporate offices, mutual fund counters and retail stores across India. The biggest consumer of the metal, some 950 tonne of it annually, India and her gold-hungry consumers are cozying up to gold funds.

Gold exchange traded funds in India that trade in physical gold are set to get a tough competition in the form of gold funds that invest in gold mining companies. Gold ETFs unique selling proposition was that one can invest in gold without worrying about its security. But most investors of gold in India want to actually possess physical gold rather than invest in paper gold. Added to it was the mandatory requirement of Demat account to buy gold ETF, which made it difficult for an average investor to invest in these funds.

Even though having gold ETF in its kitty India's largest fund house Reliance Mutual Fund feels that Indian markets are still not mature enough for gold ETFs.

Sundeep Sikka, CEO, Reliance Mutual Fund said, "Markets are not mature for Gold ETFs though we are quite bullish on ETFs in future. Since MF industry is in nascent stage ETF is not popular because investor needs a demat account since he would be buy it on the exchange. Also SIPs are not allowed in ETFs."

The high returns that gold funds have given over last six months has forced fund houses like Kotak, UTI and Reliance to plan a gold fund and they have sought approval from market regulator Sebi to launch such funds. If we compare the last 6 months returns of gold ETF with gold funds, the former has given returns of 12-13%, while the latter over 55%.

AIG World Gold Fund gave return of 57% over last 6 months while
DSP Blackrock Gold fund gave a return of over 58% over last 6 months.
Benchmark Gold ETF in the same period gave return of over 13% while
Quantum Gold ETF gave a return of over 12%.

The fact that returns from Gold ETFs depends on the variation in the gold prices there is little difference in the investment strategy between these ETFs.

Rajan Mehta, ED, Benchmark MF said, "The way ETF works is the next fund house or next fund guy cannot differentiate from the existing one. There is no fund manager skill that comes into play. It is a passive product. Secondly the platform on which it is available is same for everyone."

Experts feel that Gold ETF's are still to take off in a country like India which is famed for high jewellery sales and where investors believe in buying gold. And with markets showing recovery gold funds may be sought given the metals outstanding performance last year.