Home / Opinion / Online-views /  An alternative way to invest in gold ETFs

You can now directly invest in a gold mutual fund (MF) scheme through a systematic investment plan (SIP). Reliance Capital Asset Management Co. Ltd has launched India’s first gold MF scheme that will passively track the price movements of gold. Called Reliance Gold Savings Fund (RGSF), it is actually a fund of funds (FoF) scheme that will invest its entire corpus in the MF’s own gold exchange-traded fund (ETF), Reliance Gold ETF.

What’s new

Many of us haven’t been able to invest in gold ETFs because we do not have a demat account. Gold ETFs are MF schemes that invest in gold and then passively track gold prices. It’s a paperless way to invest in gold and capitalize on gold price. However, since gold ETFs can be bought or sold only on stock exchanges, a demat account is a must. Further, ETFs do not yet allow SIPs.

RGSF allows SIPs starting from 100 a month. “We ran numbers at the backend and realized that if an investor had invested 5,000 in this fund for the past 10 years through a monthly SIP, he would have accumulated 17.03 lakh or an amount equivalent to 839g of gold or 84 gold coins of 10 grams each," says Sundeep Sikka, chief executive officer, Reliance Capital AMC.

Cost structure

Although RGSF is an FoF and you might think you will pay over and above the cost of Reliance Gold ETF, the fine print offers relief.

In August, the Securities and Exchange Board of India (Sebi) clarified that FoFs can either charge 0.75% of total expenses or it can charge a maximum of 2.50% of total expenses including the weighted average total expense of its underlying schemes and not more than 0.75% as management fee from FoF investors.

Typically FoFs charge an additional 0.75% as its annual expenses, over and above the annual charge of the underlying scheme. For instance, if an FoF invests in four different MF schemes whose average of annual charges is, say, 1.99%, the FoF had the right to charge an additional 0.75% (think of it as a service charge you pay to the FoF for scouting and investing in MF schemes on your behalf), thereby taking the overall expense beyond 2.50% (2.74% = 0.75% + 1.99%).

Now, FoFs have two choices. They can either continue with the existing charge structure or cap the overall annual cost of the scheme at 2.50%, which included the weighted average of annual charges of the underlying schemes including a cap of 0.75% management fees that the FoF can charge.

Though RGSF will charge 0.75% annually, it will cap the overall cost (FoF + ETF charges) at 1.50%. “Going forward, we will limit our ETF’s charge structure to 0.75%. This way, investors coming through RGSF will not pay more than 1.50% in all," adds Sikka. ETFs and index funds can charge a maximum of 1.5% as annual charges. Not all fund managers are convinced.

A fund manager of a fund house that was among the first to launch a gold ETF said, on condition of anonymity: “Investors would have to take a call whether they are willing to pay extra. Open a demat account and come through gold ETF directly by paying 0.75% (new charges of ETF) or come through gold MF and pay the full 1.50%." He was quick to add, though, that his fund house too aims to launch a gold MF as it does not want to leave out any potential investor (those who don’t have a demat account).

Expect other fund houses that already have gold ETFs in their portfolios, such as Kotak Mahindra AMC and Benchmark AMC, to launch similar products in the near future.

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