How to set up SIP in ETF

by Manshu on March 15, 2010

in ETF

set SIP for ETF

I wrote about the Quantum gold savings fund yesterday, which is a fund of funds, and said that I couldn’t think of a situation in which I would want to invest in this fund. That was because it is a fund of funds that simply invests in another ETF that I can directly buy myself.

In that post I asked if you could think of any reasons of getting into such a fund, and I got an interesting comment about investing in this fund as an indirect way to set up a Systematic Investment Plan (SIP)  on an ETF (clever thinking).

This is something that I think a lot of people will be interested in because I can see a lot of interest in setting up SIP on ETFs from Indian investors.

I have covered this topic earlier and I thought I will do a quick post on this again, because since the last post I have got two comments that explore new ways of doing this.

And also because I know that a lot of you are interested in setting up SIPs on ETFs, but there is no direct way of doing this. There are a few indirect ways (which were covered here earlier) though.

Here are five such indirect methods:

1. Kotak’s Auto Invest: Kotak has a plan called “AutoInvest” that in an online trading account based on systematic investment planning  in Gold ETFs, equities and mutual funds.

2. Set up reminders with your offline broker: If you trade using an offline broker – you can tell them to remind you by giving you a call at a certain day of the month, and remind you to place the trade.

3. Set up reminders in Outlook or Gmail: You can set up reminders using Outlook, Gmail or any other tool that reminds you to invest at a certain day of the month.

4. Buy a fund of funds that owns ETFs: As stated in the comment in yesterday’s post – you can set up an SIP for a fund of funds that invests in a particular ETF you are interested in – and that gives you an indirect way of getting into a SIP for an ETF.

5. Value Averaging Investment Plan (VIP) from Benchmark funds: This is an idea given by another commenter on the earlier post. This product from Benchmark is akin to set up an ETF – I am not sure how effective this is because I haven’t used it myself or done any great deal of research on it, but it does give another option to investors.

All these methods have pros and cons and you should evaluate them in earnest before getting into any of them. For example, if you are thinking of setting up a SIP for a fund of funds – you need to keep the following factors in mind.

1. Expenses of this fund of funds: Most fund of funds charge you dual fees because they charge you their own fee, and then you end up paying the fee of the funds they hold, so in effect you end up paying twice.

2. Transaction cost of the fund of funds: When you think about setting up a SIP through a fund of funds – what is apparent is that you won’t end up paying monthly commissions to buy the ETF yourself, and that is certainly a saving. However, beneath the surface – your fund of funds must also incur transaction costs while buying the underlying ETF. Think about this factor when comparing the cost between the two.

3. Allocation: If you buy ETFs worth Rs. 50,000 every month, then you know that your 50 grand has gone into the ETF. But fund of funds may not always invest 100% of the money in the underlying fund. They may keep a part of it as liquid holdings in order to cater to redemption and such.

These are some factors that you need to keep in mind while evaluating a fund of funds for setting up a SIP instead of just buying the ETFs directly. Figuring this out on your own will be overwhelming for most, so you can take a shortcut and compare the returns on the fund of funds and ETF after a period of say six months or a year, and see how well both correlate. If there is a lot of difference between the two returns then that means that this fund of funds is not as good a proxy as you initially thought it to be.

So, there you have it – some indirect ways of setting up a SIP for an ETF, and some things to think about before you do it. Let me know what you think about these and any other ideas you have.

Photo by Sergei Golyshev

{ 11 comments… read them below or add one }

Mahendra May 26, 2010 at 4:22 am

Hi , I have 2 Daughters and wish to invest 2000 or 3000 permonth in gold but m confused as to how do i go abt it

is it like i get physical from of gold at the end of the etf maturity or i get the money like in mutual funds ,

purcahsing phsyscial gold 1 to 2 grams every months is also a tought but confused
my target will be at least 50 tolas of gold in next 15 years

how do i go abt that

Reply

Manshu May 26, 2010 at 5:06 pm

There is no maturity period of ETFs. Think of it like buying stocks for the next 15 years. There is no maturity period, you can invest till whatever time you want. Eventually, you will sell the ETF and get money like stocks or mutual funds. So, if you buy a gold ETF, you will never deal with physical gold at all.

If you are interested in buying gold coins, then I did this post some time ago that lists down the options of buying physical gold.

http://www.onemint.com/2010/04/27/where-to-buy-gold-coins-in-india/

Did this answer your question?

Reply

Rahul Arora July 6, 2010 at 5:52 am

i wnt to invest money in gold etf n i cn invest 20000 pm . How can i start

Reply

Manshu July 6, 2010 at 4:51 pm

Since there is no SIP type feature in ETFs – you will have to invest this money yourself every month. If you have a broker – he may take it upon himself to invest this for you.

Reply

Ramesh January 14, 2011 at 11:24 am

can you not buy ETFs with SIp and other mutual funds with SIP throgh ICICIdirect? is it expensive or has it any other cons?

ramesh

Reply

Manshu January 15, 2011 at 6:11 am

Ramesh – I think ICICI has now opened up a SIP option in ETFs, but that’s something new and was not present earlier. I haven’t looked at it to see the pros and cons yet.

Reply

Ramesh January 15, 2011 at 11:32 am

Thanks Manshu. I will look forward to your expert comments on
a) buying etfs through SIP at ICICIdirect
b) buying mutual funds at ICICidirect
c) buying mutual funds through SIP at iCICIdirect.

personally I find it very convenient at ICIcidirect online and sometimes I invest in shares also. but I donot know if there are better options available. I have never been to a broker.

I look forward to each of your comments and your website has become a knowledge center for us. Bless you.

ramesh

Reply

vinod September 17, 2011 at 1:27 am

dear sir, i want invest 10000 monthly in different mutual funds & in etf through sip is it possible.can i go with hdfc bank.

2.i want to know that it is compulsary that when i invest by sip i regularly invest or i stop at any time & again continue any time.

thanks

Reply

Manshu September 18, 2011 at 10:42 pm

Yes it is possible, for investing in ETFs you need a trading account so if you have one where you use it to invest in shares then you can use that same account, for mutual funds you can do so directly with the fund. Please call up a fund and get details.

Yes, SIP can be stopped at any time.

Reply

Rakesh September 30, 2011 at 11:30 pm

Dear sir, If I invest Rs.2000/month each in 5 different mutual funds, will there be higher rate of return than investing Rs.10000/month in a single mutual fund?

Reply

Manshu October 4, 2011 at 6:07 am

No, there is no guarantee of that – why do you ask that – I mean what gave you that idea?

Reply

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