When Reliance announced the NFO of Gold savings fund (now live in FundsIndia.com), we were happy that we could tell our investors that there is a way to invest in the metal through the mutual fund route. This route of investing offers investors two important benefits – one, they don’t need a demat account to invest in dematerialized gold and two, they could invest in any amount (instead of buying units of gold weights).
However, I was apprehensive of one thing – costs. A Fund of fund charges over and above the underlying fund’s charges and together they could add up to a pretty penny in terms of costs for the investor. When the scheme document came out, Reliance clarified that the total annual expenses for this scheme would be 1.5%. The fund would invest in Reliance Gold ETFs as the underlying instrument. So, the expense translates to 1% for the Reliance ETF and 0.5% for the FoF.
Still, 1.5% is more than 1% – which is what it costs as annual expenses if one were to invest in the ETF directly. But, investing in ETF has brokerage charges of about 0.3% – 0.5%. So, over different periods of investments, which works out cheaper – ETF or FoF? We did a little math to find out.
A snapshot of the calculation is below in the image. We used a 10 year time frame and a Rs. 10,000 investment.
Some assumptions:
- Gold prices grow 10% annually
- Transaction brokerage charges are 50 bps for buy and sell.
- Demat maintenance charges are not factored in (since the investor could be using the demat account for other holdings as well)
- First year exit load of the mutual fund is not factored in
So, what did we find?
Summary: The longer you hold your investment, the ETF method works out cheaper. But for a holding period of less than five years, the mutual fund route actually works less expensive. If you factor in the demat charges, this timeline would be stretched further (depending on the amount of investment)
Conclusion: If you are not an active equity market investor, and considering opening a demat account just for holding gold ETFs, you will be better off going with a gold mutual fund – not just for convenience, but also for lesser expenses.
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Hi,Thanks for the information. Could you tell me how the mutual fund houses deduct the annual fund maintenance charges from someone who has an SIP from one of their mutual funds? Is it a separate charge to be paid directly(if yes, when?) or is the amount deducted from the value of the mutual funds held by an investor.Thanks.
Hi,Thanks for the information. Could you tell me how the mutual fund houses deduct the annual fund maintenance charges from someone who has an SIP from one of their mutual funds? Is it a separate charge to be paid directly(if yes, when?) or is the amount deducted from the value of the mutual funds held by an investor.Thanks.
Prav,Simplifying it a bit, FM charges are deducted on a daily NAV basis. That is if the FMC of a fund is 2%, then every business day, 2/(number of days in year) % of the AUM is deducted before arriving at the NAV figure for the day. So, from an investor’s perspective, they pay FMC for the period that they hold the fund for – no more, no less.thanks,Srikanth
Srikanth,We are splitting hairs here. If you look at in simple manner, underlying Gold ETF E/R is common for both cases. The Gold ETF buyer pays brokerage costs only at trading. But Mutual fund buyers incur the same cost every year regardless of whether they buy/sell. So, it is clear the long term buy and hold investors will gain by buying ETF directly rather than mutual fund route – from cost angle.But then there are other angles one should look at.Any prudent financial planner would recommend diversified mutual funds for investing, compared to individual company stocks for an average investor. Same financial planner would recommend holding some money in Gold. These investors did not have a way until now to invest in Gold through mutual funds. So, they ended up opening demat account. Now the investors life becomes simple. They can have all in one mutual fund account.Next NRI investors have always problem in opening a demat account. I hope they would invest in these mutual funds to fill the gap in their asset allocation. Further automatic SIP also would help in them making investments regularly.
RRK,True, but I was just trying to quantify the width of the hair that we were splitting to the last Angstrom.:-)Thanks for pointing out the NRI convenience aspect.Srikanth
I think it is very good for Small investors who want to diversify their portfolio and also just for this diversification they were opening demat account …thanks for the comparison between costs Sir!!
Is trading account not required for investing in Gold ETF? Is Demat account sufficient?
Yes, a trading account will also be required. But unlike a demat account, trading account don’t carry maintenance fees. So, that will not impact on this cost comparison… Srikanth
Can you please list down the process to invest in Gold ETF with out Trading account?Correct me if i am wrong, for selling trading account is required.
MSS, Like I said earlier, a trading WILL be required to invest in and sell out of Gold ETF. Srikanth
Hi Srikanth,Can I make a few points about your calculation, please:1. I am not sure, how its is Rs200 in the first year. Shouldnt it be Rs1502. Should we take 50 bps for buy AND sell. We are talking of investing here. So, no sell in the assumption?3. If its 25 bps for buy, Gold ETFs is ALWAYS cheaper. I wish I could share the excel sheetPlease do enlighten whether I am wrongThanks
Hello stockbets, Each year cost is assuming that the sell happens in that year (that is the period of holding ends that year). So for the first year, twice the transaction cost plus the annual charge = Rs. 200 Well, we can’t talk about total expenses without taking the sell (which completes the investment) into account. So, both buy and sell costs have to be taken into account. You are correct on this, the lower the transaction costs, the better the ETF looks. My conclusion is that if an investor is looking at a demat account purely for Gold buying, they are unlikely to get low brokerage fees that frequent traders get. So, they are likely to get the market brokerage of 50bps for a trade that is the going rate for investors these days. But, you are right, a person who is a stock market trader with a demat account does not need to incur the extra charges of the GMF Thanks, Srikanth
Thanks for your response. In all fairness the assumption of buy and and sell every year is not the right assumption in this case since Reliance Gold Savings Fund – as the name suggests – is not aimed at those who want to buy and sell. It is aimed at savers – whose behaviour is necessarily longer term than 1 year. At least thats everybody – from planners and fund companies – preach.The right comparison would be if you buy and hold for 5 years what about the costs in each case
i want to know that if we buy RELGOLD ETF today so when How they deduct 1% annual charge ? I have since 2 years but qunty is same so pls pls pls give me answer ? or GOLDBEES have same charge strucure some time diff between those ETF is 50 and some time it riched 80 and time spend than gap is going huge so pls tell me how they charged us?
Hi, All mutual funds (including ETFs) deduct fund management charges the same way – every day the NAV of the fund is lowered by a very small, tiny percentage which is the one day equivalent of the annual fund management charge. So, for example, if the fund management charge is 1%, and there are 200 business days then 1/200% of the NAV is subtracted (approximately) from the NAV. This is how MFs charge the fund management charge. Hope this clarifies, Srikanth
Another important difference which affects the return is Gold ETF prices can be lower or higher than the NAV of that day while buying and selling, depending on the market sentiment, but Gold Mutual funds can be purchased or redeemed at the closing NAV of that day. This can make a lot of difference. This benefits which investment ETF or MF is not clear. Please clarify.
Hi Srikanth,This post is very useful. I am new baby in term of investments. I want to invest in Gold (Physical) / Gold ETF or Gold SIP for my Daughter Marriage . My Constraints are following.1. My Period of Investment will be more that 15 yrs.2. Till yet i had never invested in any Mutual fund or Sip so my knowledge in this is Zero.3. If ETF is the right option than pls suggest me some best ETF & Demat Account for it.Doubts….1. Suppose i buy gold ETF or SIP than do they buy physical gold of that Rs or they investment in some other assert. For example i invested 30,000/- (Say 10gm) on 20th Oct 2011 than my assert will be 30,000 + premium Rs or 10gm gold price on 22th Oct 2011 ?2. Do ETF or SIP have some lock period or it can be hold for any time ?Kindly answer… thanks in advance…RegardsChandresh
Hello sir, Thanks for your query. The best way to go about investing in Gold periodically (using SIP) is to invest in gold mutual funds – funds like Reliance gold savings fund or Quantum gold fund – which in turn invest in Gold ETFs. This way you can invest conveniently in real rupee terms. Your investment will track the actual price of gold. Gold mutual funds do not come with any lock-in periods, but they do have about 1% exit load if you redeem within the first year of your investment. Quantum gold fund is the best in this regard due to its low expense ratio. Thanks, Srikanth
Have written a blog for comparing Gold ETF vs Gold Fund Of Funds, following is the link http://goldetfvsgoldfof.blogspot.in/There are in total 9 points covered which can act as differentiators between gold ETF and Gold FOF.
which the best for investment gold fund or etf? which one gives high returns?
Hello,
I am unable t o download file gold_etf_mf.xls published in this post. Also, I am not able to see image in this post.
Thanks,
Jaydip
Hi Srikanth,Can I make a few points about your calculation, please:1. I am not sure, how its is Rs200 in the first year. Shouldnt it be Rs1502. Should we take 50 bps for buy AND sell. We are talking of investing here. So, no sell in the assumption?3. If its 25 bps for buy, Gold ETFs is ALWAYS cheaper. I wish I could share the excel sheetPlease do enlighten whether I am wrongThanks
MSS, Like I said earlier, a trading WILL be required to invest in and sell out of Gold ETF. Srikanth
Yes, a trading account will also be required. But unlike a demat account, trading account don’t carry maintenance fees. So, that will not impact on this cost comparison… Srikanth
Hello stockbets, Each year cost is assuming that the sell happens in that year (that is the period of holding ends that year). So for the first year, twice the transaction cost plus the annual charge = Rs. 200 Well, we can’t talk about total expenses without taking the sell (which completes the investment) into account. So, both buy and sell costs have to be taken into account. You are correct on this, the lower the transaction costs, the better the ETF looks. My conclusion is that if an investor is looking at a demat account purely for Gold buying, they are unlikely to get low brokerage fees that frequent traders get. So, they are likely to get the market brokerage of 50bps for a trade that is the going rate for investors these days. But, you are right, a person who is a stock market trader with a demat account does not need to incur the extra charges of the GMF Thanks, Srikanth
Have written a blog for comparing Gold ETF vs Gold Fund Of Funds, following is the link http://goldetfvsgoldfof.blogspot.in/There are in total 9 points covered which can act as differentiators between gold ETF and Gold FOF.
Can you please list down the process to invest in Gold ETF with out Trading account?Correct me if i am wrong, for selling trading account is required.
Hi Srikanth,This post is very useful. I am new baby in term of investments. I want to invest in Gold (Physical) / Gold ETF or Gold SIP for my Daughter Marriage . My Constraints are following.1. My Period of Investment will be more that 15 yrs.2. Till yet i had never invested in any Mutual fund or Sip so my knowledge in this is Zero.3. If ETF is the right option than pls suggest me some best ETF & Demat Account for it.Doubts….1. Suppose i buy gold ETF or SIP than do they buy physical gold of that Rs or they investment in some other assert. For example i invested 30,000/- (Say 10gm) on 20th Oct 2011 than my assert will be 30,000 + premium Rs or 10gm gold price on 22th Oct 2011 ?2. Do ETF or SIP have some lock period or it can be hold for any time ?Kindly answer… thanks in advance…RegardsChandresh
i want to know that if we buy RELGOLD ETF today so when How they deduct 1% annual charge ? I have since 2 years but qunty is same so pls pls pls give me answer ? or GOLDBEES have same charge strucure some time diff between those ETF is 50 and some time it riched 80 and time spend than gap is going huge so pls tell me how they charged us?
Thanks for your response. In all fairness the assumption of buy and and sell every year is not the right assumption in this case since Reliance Gold Savings Fund – as the name suggests – is not aimed at those who want to buy and sell. It is aimed at savers – whose behaviour is necessarily longer term than 1 year. At least thats everybody – from planners and fund companies – preach.The right comparison would be if you buy and hold for 5 years what about the costs in each case
which the best for investment gold fund or etf? which one gives high returns?
Hi, All mutual funds (including ETFs) deduct fund management charges the same way – every day the NAV of the fund is lowered by a very small, tiny percentage which is the one day equivalent of the annual fund management charge. So, for example, if the fund management charge is 1%, and there are 200 business days then 1/200% of the NAV is subtracted (approximately) from the NAV. This is how MFs charge the fund management charge. Hope this clarifies, Srikanth
Hello sir, Thanks for your query. The best way to go about investing in Gold periodically (using SIP) is to invest in gold mutual funds – funds like Reliance gold savings fund or Quantum gold fund – which in turn invest in Gold ETFs. This way you can invest conveniently in real rupee terms. Your investment will track the actual price of gold. Gold mutual funds do not come with any lock-in periods, but they do have about 1% exit load if you redeem within the first year of your investment. Quantum gold fund is the best in this regard due to its low expense ratio. Thanks, Srikanth
Another important difference which affects the return is Gold ETF prices can be lower or higher than the NAV of that day while buying and selling, depending on the market sentiment, but Gold Mutual funds can be purchased or redeemed at the closing NAV of that day. This can make a lot of difference. This benefits which investment ETF or MF is not clear. Please clarify.
Hello,
I am unable t o download file gold_etf_mf.xls published in this post. Also, I am not able to see image in this post.
Thanks,
Jaydip
RRK,True, but I was just trying to quantify the width of the hair that we were splitting to the last Angstrom.:-)Thanks for pointing out the NRI convenience aspect.Srikanth
Srikanth,We are splitting hairs here. If you look at in simple manner, underlying Gold ETF E/R is common for both cases. The Gold ETF buyer pays brokerage costs only at trading. But Mutual fund buyers incur the same cost every year regardless of whether they buy/sell. So, it is clear the long term buy and hold investors will gain by buying ETF directly rather than mutual fund route – from cost angle.But then there are other angles one should look at.Any prudent financial planner would recommend diversified mutual funds for investing, compared to individual company stocks for an average investor. Same financial planner would recommend holding some money in Gold. These investors did not have a way until now to invest in Gold through mutual funds. So, they ended up opening demat account. Now the investors life becomes simple. They can have all in one mutual fund account.Next NRI investors have always problem in opening a demat account. I hope they would invest in these mutual funds to fill the gap in their asset allocation. Further automatic SIP also would help in them making investments regularly.
I think it is very good for Small investors who want to diversify their portfolio and also just for this diversification they were opening demat account …thanks for the comparison between costs Sir!!
Is trading account not required for investing in Gold ETF? Is Demat account sufficient?
Prav,Simplifying it a bit, FM charges are deducted on a daily NAV basis. That is if the FMC of a fund is 2%, then every business day, 2/(number of days in year) % of the AUM is deducted before arriving at the NAV figure for the day. So, from an investor’s perspective, they pay FMC for the period that they hold the fund for – no more, no less.thanks,Srikanth