More and more fund houses are adopting the feeder fund model to attract investments in gold ETFs.
Exchange-traded funds (ETFs) in India have not been able to attract a lot of money, primarily because investors do not have demat accounts. To circumvent this, fund houses are introducing schemes that will collect money and invest in their own ETFs.
Reliance Mutual Fund and Kotak Asset Management Company have launched their gold saving funds, which will invest in their ETFs. And, industry players say more such funds are in the fray.
Besides investing in gold, a small part of the money — five to 10 per cent — will be used to invest in fixed deposits and other short-term money market instruments for liquidity. The performance of these funds will be benchmarked against the price of physical gold.
At the launch of Reliance Gold Saving Fund, Sundeep Sikka, chief executive officer of Reliance Mutual Fund, said, “We are not targeting mutual fund investors only. Fifty per cent Indians buy gold in the physical form. We want that fifty per cent to buy the fund.”
Another innovative option by fund houses is to introduce systematic investment plans (SIPs) in these schemes. Gold ETFs did not allow SIPs. “Since brokers do not want small deals of Rs 1,000-2,000, this concept is good for retail investors who want to invest in gold,” says Gaurav Mashruwala, a certified financial planner. Also, using the SIP route would help investors to put money in tranches.
The minimum investment amount for gold saving funds is Rs 5,000 if you want to invest in lump sum, and Rs 100 for SIPs. You could invest up to 10 per cent of your portfolio in gold. However, the expense ratio of gold saving fund is higher than a gold ETF. Typically, a gold ETF charges one per cent, whereas gold saving funds will charge a maximum of 1.5 per cent. According to the Securities and Exchange Board of India (Sebi), a fund-of-fund can either levy 0.75 per cent of total expense, or a maximum of 2.5 per cent of it, including weighted average of total expense of underlying scheme and not more than 0.75 per cent as management fee from investors of feeder fund.
Along with the one per cent expense ratio, you will have to pay an annual maintenance fee (Rs 400-500), a brokerage of 0.5 per cent and a transaction fee, depending on the number of units you sell. Say, you invest Rs 2,000 a month in gold saving fund, your annual cost (on an annual investment of Rs 24,000) will be over two per cent.
“For those who do not invest in equity, this cost could be significant if they own a demat account only for gold ETFs,” says Hemant Rustagi of Wiseinvest Advisors. Another cost could be the exit load of two per cent, if you redeem units before completion of the first year.
The tax incidence on this product will be same as that for gold ETFs. It will be treated as debt funds. On redemption, the units held for over a year qualify for a long-term capital gain tax of 10 per cent without indexation, or 20 per cent with indexation. When units are held for less than a year, short-term capital gain will be clubbed with the income of the individual investor and be taxed.
For those looking at investing in safer haven to take advantage of gold price movement, this is yet another product, but not for retail investors. Destimony Securities has a gold saving scheme for a minimum investment amount of Rs 5 lakh, mainly for high net-worth individuals. It is a portfolio management services product, which will invest in gold ETFs of all Sebi-approved mutual funds, along with capital protection.
