Gold ETF vs. Reliance Gold Fund – a cost comparison

February 16, 2011 . Srikanth Meenakshi

When Reliance announced the NFO of Gold savings fund (now live in, we were happy that we could tell our investors that there is a way to invest in the metal through the mutual fund route. This route of investing offers investors two important benefits – one, they don’t need a demat account to invest in dematerialized gold and two, they could invest in any amount (instead of buying units of gold weights).

However, I was apprehensive of one thing – costs. A Fund of fund charges over and above the underlying fund’s charges and together they could add up to a pretty penny in terms of costs for the investor. When the scheme document came out, Reliance clarified that the total annual expenses for this scheme would be 1.5%. The fund would invest in Reliance Gold ETFs as the underlying instrument. So, the expense translates to 1% for the Reliance ETF and 0.5% for the FoF.

Still, 1.5% is more than 1% – which is what it costs as annual expenses if one were to invest in the ETF directly. But, investing in ETF has brokerage charges of about 0.3% – 0.5%. So, over different periods of investments, which works out cheaper – ETF or FoF? We did a little math to find out.

A snapshot of the calculation is below in the image. We used a 10 year time frame and a Rs. 10,000 investment.

Some assumptions:

  1. Gold prices grow 10% annually
  2. Transaction brokerage charges are 50 bps for buy and sell.
  3. Demat maintenance charges are not factored in (since the investor could be using the demat account for other holdings as well)
  4. First year exit load of the mutual fund is not factored in

So, what did we find?

Summary: The longer you hold your investment, the ETF method works out cheaper. But for a holding period of less than five years, the mutual fund route actually works less expensive. If you factor in the demat charges, this timeline would be stretched further (depending on the amount of investment)

Conclusion: If you are not an active equity market investor, and considering opening a demat account just for holding gold ETFs, you will be better off going with a gold mutual fund – not just for convenience, but also for lesser expenses.

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