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Feeder funds are the cheapest way to invest in gold

Buying jewellery and investing in gold should not be seen as equivalent. Go for the most cost-effective way

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With around the corner, you might be planning to buy . And, if you don’t intend to use it anytime soon, rather than buying , this could be a good opportunity to invest in gold. Many might have accumulated gold for gifting, over time, in the form of jewellery. But, buying jewellery and investing in gold should not be seen as equivalent.

There are four ways to put your money in gold — buying physical gold/jewellery, putting money in gold exchange-traded funds (), investing in a gold savings fund and going for the ’s e-gold. Now, some gold ETFs and e-gold even allow taking physical delivery of gold at the end of investment tenure. That might sound good if you wish to possess physical gold.

But, given the firm price of gold today (almost Rs 31,000 per 10g), it is important that gold is bought through a cost-effective avenue. Reason: Investing comes at a price.

Add to that, India’s gold buying is expected to decline in 2012 and 2013, according to the latest (WGC) report. WGC Director Vipin Sharma feels gold imports may drop to 800 tonnes from 967 tonnes last year. And the mix between the jewellery and gold investment will also change to see investment finding favour. WGC expects the country’s gold markets to gain momentum in the festival season this year. Experts, otherwise, feel gold will be in demand and the prices will range between Rs 31,000 and Rs 35,000 per 10g till June 2013. So, you could keep accumulating gold in small portions across price levels.

Which is the most cost-effective way? If you ask the experts, they would unanimously favour paper gold more than physical gold — because, besides storage and safety issues, physical gold is costlier, too.

Sample this: If you want to invest Rs 10,000 in gold coin or bar this Diwali, banks will charge you 10-15 per cent higher than the market price. Jewellers will price it 5-10 per cent higher. The post office charges a premium of 15-20 per cent on gold coins. This means you lose between Rs 500 and Rs 2,000 if you go for any of these.

Instead, if you take the gold ETF route, your cost of investment will be Rs 500. Here’s the break-up: Asset management companies charge one per cent as expense ratio (percentage of the assets spent to run a fund), demat account (a must for investing in gold ETFs) levies a maintenance fee of up to Rs 450 a year, there is a small transaction fee (for transacting through the demat account) at Rs 1 per lakh of transaction and a brokerage fee of up to 0.5 per cent.

If you opt for Motilal Oswal’s ETF in lieu of physical delivery, you have to shell out an extra amount in case you redeem less than 1,000g of gold. You will have to pay Rs 750 per 10g of gold and Rs 250 per 100g of gold. In this case, your total cost will be between Rs 750 (500 + 250) and Rs 1,250.

PICK THE ONE THAT’S BEST FOR YOU
Physical gold
  • Sold at 5-20% higher price by banks, jewellers and post offices
Gold ETFs
About the product: ETF is a security that tracks an underlying asset like Sensex or Nifty, in this case gold. But, it is traded like a stock on an exchange. The expense ratio for ETFs tend to be lower than those of other funds because ETFs may be passively managed as it has an underlying

Charges:

  • Brokerage = up to 0.5 per cent
  • Demat maintenance cost = Rs 400-450
  • Expense ratio = 1 per cent
  • Transaction charge = Rs 1 per lakh of transaction
Gold Feeder Funds
About the product:  A feeder fund invests directly into its firm's existing funds established elsewhere. Here, gold feeder funds invest in gold ETFs of the asset management fund

Charges:

  • Expense ratio = 1.5 per cent
E-gold
About the product: E-gold is a part of the National Spot Exchange's e-series investment product in commodities. Here, gold is bought in electronic form, and held in a demat account with an exchange empanelled depository participant. One unit of e-gold is equal to one gram of physical gold

Charges:

  • Brokerage = 0.25-0.5 per cent
  • Demat maintenance cost = Rs 400-450
  • Transaction fee = Rs 20 per lakh of transaction
  • Storage charge = 60 paise per month per unit
  • Delivery charge = Rs 200 per lifting
  • Making, packaging and refinery certification charges = Rs 200 (8 and 10 g); Rs 100 (100 g)
  • = 1 per cent
  • Octroi = 0.1 per cent for Mumbai
Source: National Spot Exchange website, mutual fund houses’ websites

The good part is mutual fund houses (like , , , IDBI Mutual Fund) now allow you to invest systematically.

However, if you invest through another mutual fund instrument, gold savings funds, you will need only Rs 150 a year, as the only cost levied is the expense ratio of 1.5 per cent. Gold savings funds are feeder funds. “If you do not have a demat account, gold feeder funds are a good option, as it does not make sense to open a demat account only for buying gold via ETFs,” says Hemant Rustagi of Wiseinvest Advisors.

In comparison, e-gold, according to the National Spot Exchange’s website, levies a transaction cost of Rs 20 per lakh of transaction, a storage cost of 60 paise per month per unit (which, if not paid, attracts an interest of 15 per cent a year — equal to interest cost for a personal loan), delivery charge of Rs 200 per delivery/lifting (irrespective of number of coins/bars involved in the delivery instruction), making, packaging and refinery certification charges of Rs 200 (for eight- and 10g bars and coins) and Rs 100 for a 100g one. Also, you need to pay VAT/GST and other local taxes like octroi (0.1 per cent for Mumbai), if any, as may be applicable at the place of delivery on that date. According to the current rates, VAT will be one per cent of the value of goods.

Total cost comes to Rs 536. How? Assuming the total value of gold stands at Rs 10,000 and you hold 10 units, VAT and Octroi cost will be Rs 100 and Rs 10, respectively, and the storage cost will be Rs 6 per month. Add to that, transaction cost of Rs 20, delivery charge of Rs 200 and making charge of Rs 200 (for a 10g coin).

Therefore, a cost-effective investment avenue for buying gold this Diwali can be gold saving funds. Besides, you don’t even need a demat account and can invest systematically in these funds. However, the problem with these is that they invest in gold ETFs of the fund house and, so, might not always outperform the ETF with a significant margin.

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