As an investment option, gold is back on the table. Yellow metal prices have risen 6.2 percent over the previous year.
Overall, Indians have always been one of the largest customers of gold. Some invest in gold-investment mutual funds and some invest in sovereign gold bonds. And since gold is available in paper form throughout the year, such as gold mutual funds or exchange-traded funds, it becomes an issue of convenience for individual investors to stagger their investment.
Gold mutual funds are of two types – Gold exchange-traded funds (ETF) and Gold Saving Fund. Gold ETFs are mutual fund schemes, as indicated by the name, which invests in gold and is listed on stock exchanges. These are passively managed funds – the fund manager’s role is limited to buying 99.5 purity bullion gold and holding it with the custodian of the scheme.
This is done to replicate the price efficiency of the physical form of gold. Simply, gold ETFs are estimated to be equal to the yield provided by physical gold, before planning expenses and tracking error. The investor should reduce the tracking error.
According to Value Research-a mutual fund monitoring company, the expense ratio of these funds range from 0.55% to 1.18%.
An investor can buy and sell units of a gold ETF on the stock exchange. However, he needs a Demat account to buy gold ETF units.
A gold ETF denies the need for physical gold to be held and stored. But it has one disadvantage: it does not allow you to make a systematic investment plan. It can be challenging to maintain purchase orders on the stock exchange at frequent intervals.
Some brokers allow monthly or weekly, use Equity Systematic Investment Plan (Equity SIP) to buy gold ETF units at certain intervals. However, the investor should specify the number of units to be purchased at the time of each purchase in that case. With such an agreement, not everyone is comfortable.
Mutual funds went out with gold savings funds to solve all these problems and enable investors to buy a fixed amount of gold ETFs per month (or at a periodic selection interval) without insisting on a Demat account.
It is feeder funds, which purchases units of gold ETF. These schemes help investors in making SIPs and help in the allocation of cash. This comfort comes at an additional cost layer.
The percentage of expenditure on these resources ranges from 6 basis points to 1.82%. Note that this is beyond the cost of the original gold ETF in which the fund invests in gold savings.
Effective from 1 April 2019, the maximum total expense ratio of ETFs will be limited to 1%, while the same amount for funds will be limited to 2%. Each such arrangement has cost consequences. While gold ETFs are provided with transaction cost ratios, Demat charges and brokerage, gold savings funds come with high expenditure ratios.