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Are you gripped by a burning desire to own gold, like that posse of outlaws in Mackenna's Gold? No? Even if you aren't , the returns notched up by the yellow metal makes it a hard-to-ignore investment option today. Gold, in Indian rupees, has served up a 20 per cent annual gain in the last five years, trouncing the stock market's 12 per cent annual appreciation. That's why investment options to own gold in paper form have mushroomed in the form of jewellery savings schemes, futures contracts in the commodity exchanges and gold exchange traded funds that are listed and traded much like stocks.
Gold fund of funds
These paper-gold options however, are for investors who already dabble in commodities or stocks. What if you wouldn't touch stocks with a barge pole and would yet want to invest in gold? Mutual fund houses have come up with a new avenue recently - Gold ‘fund of funds' that don't require you to have a demat account to invest. Kotak Gold Fund and Reliance Gold Savings Fund, the two new products collect money from investors and use that to buy units of Gold Exchange Traded Funds (ETFs). While Reliance Gold Savings Fund invests in Reliance Gold ETF, Kotak Gold Fund does likewise with Kotak Gold ETF. As Gold ETFs mirror the market price of physical gold, your investment gets to jive to every gold price move!
No demat
Why would you want to take this convoluted route, while you can buy Gold ETFs on the stock exchanges? Two reasons. First , if you don't own a demat account, taking the fund-of-funds route is more cost-effective. Suppose you were to open a demat account just to invest in Gold ETFs, this will entail expenses - a flat annual maintenance charge of between Rs 100-900, brokerage charges of 0.05 to 0.50 per cent and a one per cent annual recurring expense charged by the ETF manager. Which means that on an investment of Rs 10,000 a year, up to 10 per cent (if you drive very bad bargains with your broker) of the annual return may be swallowed up by expenses! Now, compared to that, you can buy the Gold fund-of-funds from fund houses, at an annual recurring fee of just 1.5 per cent, leaving you with much higher returns.
However, this comparison is slightly flawed because we are applying the entire demat charges only to your Gold ETF holdings. In practise you may have to open a demat account anyway, to hold stocks, bonds and mutual funds, not just ETFs.
Auto-pilot
Gold fund-of-funds also score over Gold ETFs on affordability and convenience. Both Kotak and Reliance Gold Fund offer a monthly systematic investment plan (SIP) facility.
This allows you to make gold investments for as little as Rs.100 a month (over five years) in the case of Reliance Gold Fund or Rs.1000 (for 6 months) in Kotak Gold Fund.
SIPs are also a sensible way to invest, with gold prices are hovering at a record high by averaging your purchases over many price points.
Taking the SIP route is far easier with the Gold fund-of-funds products, as you can issue post dated cheques or an ECS mandate.
Fee and returns
If you've decided to opt for the Kotak or Reliance Gold fund, what are the returns you can expect?
Suffice it to say that returns from these funds will closely track the gains in the actual market prices of gold in India, before adjusting for the fund's costs.
Gold as of today has delivered a five-year return of 20 per cent, three year return of 19.6 per cent and one year gain of 23 per cent.
However, expecting such high returns to sustain over the next five or 10 years may be unrealistic. The final returns that you earn from these funds may be between 1.5 and 2 percentage points lower than the gold price returns, on account of fund management fees and tracking error. Both Reliance and Kotak have capped the overall expenses on their gold funds at 1.5 per cent a year. Now that is not exactly cheap, given that these funds do not actively manage money. However, this is still the most cost effective option to hold gold today, as others - jewellery (making charges, wastage, lower purity) and bars from banks (12-15 per cent premium) – impose far stiffer costs.
Tracking error
A final advantage that the Kotak or Reliance products offer over plain Gold ETFs is their ability to shadow gold prices more closely (lower tracking error) . Retail investors trading Gold ETFs on the stock exchange often find their market prices straying far away from their NAV. Because ETFs are not heavily traded, buying or selling a large number of units may impact their price.
You can't do much about these distortions as a small guy . But investing through the Kotak or Reliance Gold funds allows you to take the institutional route.
These funds will be able to buy gold units directly from the ETF at their NAV, helping them minimise tracking error. Kotak Gold Fund (open until March 18) expects its tracking error to be capped at 2 per cent, with a likely level of 1.5 per cent a year. Watch out for the following when you invest:
With gold prices at a record, ‘safety' is illusory. Take the SIP route.
Hold for at least 5 years to make the most of the SIP.
Opt for growth, not dividends. Gold doesn't provide regular income.
Don't put more than 5-10 per cent of your savings in gold
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