SBI Gold Fund Review

by Manshu on August 24, 2011

in Mutual Funds

SBI Gold Fund is a fund of funds that will have gold as its underlying asset, and will primarily invest in its own gold ETF – SBI GETS.

It was just a matter of time that SBI came out with a fund of fund that invests in gold since gold has been on fire lately to such an extent that the world’s biggest gold ETF – SPDR Gold Shares owns more than 1,200 tons of gold! That’s not a typo – they really do own 1,284 tons of gold! 

In my last post about gold ETF performance in India – I discussed how 4 new gold ETFs have been launched in the last year, and it’s only natural for players to jump in this market since that’s where the demand is.

Getting back to the SBI Gold Fund – this is a fund of funds targeting gold. In this case it means it will own another fund which then owns the physical gold. The other fund in this case is the ETF – SBI GETS.

Now, this is really important because I see a lot of people who say gold ETFs don’t really own gold and they are fraud, or they say that they don’t understand the way gold ETFs work and it’s not safe and then they go ahead and buy a gold mutual fund which in turn will buy gold ETFs!

Ways of owning gold

Ways of owning gold

If you don’t like gold ETFs – you have no business buying a gold mutual fund that then owns a gold ETF! It makes absolutely no sense at all.

Please understand that there is no gold mutual fund in India that owns physical gold directly. There is only one type of gold mutual fund in India, and those are gold fund of funds. This means that they invest in other funds.

Those other funds are of two types – gold ETFs or mutual funds that own shares in international gold mining companies.

SBI Gold Fund is the type of fund that will  own units of the SBI Gold ETF called SBI GETS.

So, you must understand that when you are buying SBI Gold Fund – you are really owning units of SBI GETS.

Now, let’s talk about some other aspects related to the SBI gold fund.

Expenses of the SBI Gold Fund

Every mutual fund or ETF incurs some expenses in running its fund, and these expenses are recovered from the unit holders by reducing the NAV to the extent of the expenses. These expenses are charged as a percentage of the assets and in case of the SBI Gold Fund – their document says that the expenses will not exceed 1.5% of assets including the charges of the SBI GETS ETF.  Practically, I don’t know how much they are going to charge, but due to the competitive nature of the gold ETF market – fees have remained low and about the same for every fund.

Tracking Error

Another thing about fund of funds is that they are not able to put 100% of the money in the underlying asset because they need some cash or liquid investments to take care of any unit redemption that happens. These are usually in low yielding instruments, and I would expect the returns on the SBI Gold Fund to be slightly lesser than the returns on SBI GETS due to this reason.

Exit Load

Since this is a mutual fund, they have the luxury of charging you a 1% exit load if you exit out before a year. If you just bought SBI GETS directly, you wouldn’t have to bear this load if you exited within a year.

Stock Commissions

There will be no brokerage or commissions since this is a gold mutual fund, however if you do buy  SBI GETS directly – you will have to pay commissions since that is traded like a share. If you are buying in smaller quantities then that can make a lot of difference in your cost, and that’s one thing to keep in mind.

Demat and SIP

You don’t need a Demat account to own the SBI Gold Fund whereas you do need a Demat account to buy shares or units of SBI GETS or any other gold ETF.

Since this is a mutual fund – you can do a SIP as well.

NFO Dates

The SBI Gold Fund NFO is going to start on the 19th August 2011, and closes on September 5th 2011.

This should really not make any difference as you don’t gain anything by buying a mutual fund during its NFO period. The 10 rupee NAV is the most ridiculous myth when it comes to mutual funds, and if you don’t know why I am saying that read my earlier post about why mutual fund NAV doesn’t impact performance. 

Conclusion

Because of what I said earlier about expenses and tracking error – I would expect the performance of the SBI Gold Fund to lag the performance of SBI GETS as long as gold prices are rising.

Personally, I don’t see much merit in buying a fund of funds when you can buy the underlying fund directly.

People who want to buy small amounts like say less than a thousand rupees and don’t have a Demat account may be an exception to what I’m saying, but other than that I would think that investors are better off buying a gold ETF instead.

Now, this doesn’t mean that I’m recommending gold, and to be frank my aversion to it has only increased seeing the rise in the last few days, but what I mean is if you were considering buying a gold fund of fund – give a serious thought to buying a gold ETF instead.

Image Credit: Gold bar image

{ 42 comments… read them below or add one }

Hemant Beniwal August 24, 2011 at 7:11 am

Hi Manshu,
I have also done a review on SBI Gold Fund 🙂
Fancy of Gold, Craze of SIP, Advertising Campaign, Supporting views from media & a big push from agents may drive people to wrong decision.
Today, everyone is ready to convince that gold price will only go higher but I just want to say – gold should be small part of asset allocation and the reason of buying gold should not be rise in price.

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Manshu August 24, 2011 at 8:19 pm

Hi Hemant,

I read your post and felt that you are genuinely concerned about the frenzy all this has created. I also have a feeling this is not going to end well, but I first wrote about it in 2008, and the price has shot up since then. I still feel this has all the components of looking like a greater fool play at the end of the run, but who knows when that will happen.

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Hemant Beniwal August 24, 2011 at 10:53 pm

Hi Manshu,
This game is like “Musical Chair” & someone will be having bomb in his hands. 🙁 Let people decide what is right for them – its their hard earned money. (and we can’t time the market)

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Manshu August 25, 2011 at 12:54 am

Hmmm, this kinda reminds of the IT boom when there were frequent articles of how Infy and Wipro will form 75% of the Index in the next few years etc.

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Paresh August 24, 2011 at 9:04 am

Dear Manshoo,
I can offer investors gold funds as well NSEL facilities,,then also I think that for a longer term investor gold fund is more cost effective.

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Manshu August 24, 2011 at 8:36 pm

Dear Paresh,

You have left several comments here, and it is fine for you to leave your contact number and email at the end of the comment so that people can see it and contact you if interested.

Thank you for all your comments- much appreciated.

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Paresh August 25, 2011 at 12:26 am

Dear manshu,
Thank you for allowing me to leave my contact details.From next time I will surely take the advantage.

But what I think in general, consistency is the most important factor for any successful investor.Whether its equity or gold, consistency is the prime factor and its possible to achieve in only mutual funds via SIP and necessarily top up some lumpsum amount at lower levels as we are doing in equity market now..Even for ULIPs I think that if any investor consistantly remain invested for about 15 years or more..it is also benefecial..
Investors have to pay everywhere..in gold funds they are paying as expense ratio,, in ETFs they will pay for brokerages…

One of my friend goes 10 Kms away from his home to purchase vegetables though it is available nearby.He do not understand that to save 10 rupees in vegetables he is spending Rs.20 more on petrol… in gold funds expenses are inclusive in NAV (unlike that happens in ETFs as brokerage is payable separetely) so they may look expensive..

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Manshu August 25, 2011 at 12:52 am

Yes, consistency is the key, and regular investing is great. However, where you invest is important as well. If you can get the same benefit from buying term insurance and mutual funds for a lot cheaper than you will get from buying ULIPs then why buy ULIP?

If you can buy a gold ETF directly then why buy a gold mutual fund which will then in turn buy an ETF?

I have seen several comments from people here who are interested in buying very small quantities of gold every month, and I think that’s the only class of people that will benefit from this product.

Ultimately, there will be different products that will suit the need of different investors and as long as someone buys something being fully aware of facts then that’s fine. It’s all the misleading, and mis – selling that causes the issues.

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Paresh August 25, 2011 at 9:02 am

Actually my comment on ULIP was for them who have already purchased it and completed 3 or 5 years.
I think answer of your question “Why noy to buy Etfs directly? ” is in poor volumes and assets a of ETfs.Though there is sharp rise in Gold prices AUM under ETFs is nowhere.It means that peoples are buying it and immediately tempted to sell it when there is some profit and there is no longer term approach at all.
I commented this one earlier at one place and want to repeat it that,,imagine condition after 10 years,,You will find that investor in mutual funds is more consistant in his investment and investor in ETfs will find him purchased some of the units here and there only.

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Furqan August 25, 2011 at 10:04 am

Normally Gold ETFs are issued in equivalent of 1 gm of gold, whereas in case of Gold Fund units are issued with a face value of Rs 10. Its so much easier to track the valuation/performance of ETF vis-a-vis spot gold prices.

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Vijay August 25, 2011 at 12:01 pm

Dear Mr.Paresh,
Just wanted to clarify with you the issue of consistency of investment in a Gold MF Vis a Vis Gold ETF. If i already possess a Demat account and started an SIP in a Gold ETF@1 unit per month, isn’t that a better way of directly owning Gold?

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Furqan August 25, 2011 at 12:31 pm

@Vijay
Its way better to go for monthly SIP in a Gold ETF rather than a Gold Fund.
However, you need to be disciplined enough to do it every month without fail else you may not accrue benefits of SIP.

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Paresh August 25, 2011 at 1:34 pm

Surely go ahead if your broker allows SIP in ETfs..
Hopefully you are aware that there is expense ratio 0f at least 1% for gold etfs.

So,It depends upon investor whether he wants to pay for extra 0.50% in gold funds or brokerage charges in ETFs.

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Manshu August 25, 2011 at 10:09 pm

Paresh – re poor volumes, since a gold MF will then go and invest in the gold ETF of the parent company, the AUM for the MF will never be greater than the AUM for the ETF. I

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Paresh August 25, 2011 at 11:34 pm

yes of course…
but Gold fund will form a major part of ETfs ..while commenting here I quickly check at valueresearch for AUMs under reliance etf and gold fund.As on 30-06-2011(latest data may be available somewhere),AUM under gold etf was 1135 crore and AUM under gold fund was 790 crore.

Why this has happened? Reliance ETf has launched in 2007 and gold fund have launched in 2011.Then also AUM under ETFs,excluding that of gold funds are nowhere…

Secondly,,gold fund being the large investor,i am not sure but they may have privileged to buy units directly from mutual funds(unlike through NSE or BSE) through creation of units.

Thirdly,,I quickly check the returns at valueresearch for last 3 months…..
Reliance ETf have offered 13.78% while gold fund have offered 15. 54% for the same period…Somewhat similar case for quantum funds also….Quantum ETf have offered 13.74% while their gold fund have offered 14.74% for the same period….What do you think why it has happened??

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Manshu August 26, 2011 at 12:41 am

Re AUM – Benchmark or GS GoldBeES has a little over Rs. 2,000 crores in assets without having any MF, but that’s not the point. The point is when you say the ETF has low assets, and low liquidity that means you want to avoid that so that in times of crisis or volatility the price is not distorted too much. You want to look at some other asset which has more volumes and more liquidity. If you buy the same ETF through a MF then you end up owning the same low liquidity asset albeit through a different medium, and that too adding one more layer to it.

I think we all know why the MF assets have grown so much faster than the ETF asset, – no one earns a fee when an ETF is sold, and there is no army of reps gearing in to sell them.

Re direct asset creation – the prospectus of these funds doesn’t say that they will, but even if they did that will only be beneficial to the extent that they are either able to buy the units at a discount or redeem it at a premium. I don’t think anyone can say with certainty that this will happen, especially in liquid funds like Gold BeES..

Re returns – most of these funds were launched in May this year, so there hasn’t been much time since they have been on the market, plus there was some pretty big falls yesterday and that might have made a difference.

I see most of these funds charging their own fee on top of the fee of the ETF, and I think that should definitely show up in the slightly longer period of a year or so and affect performance negatively.

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Paresh August 26, 2011 at 9:43 am

That’s fine manshu.These are the topics of endless discussion..so lets better to stop here…hopefully you don’t think that i was spamming here
(As I have already blacklisted at couple of blogs since NFO of reliance gold fund..)…Thats fine…time will tell only what will happen..

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Manshu September 26, 2011 at 10:34 pm

I just noticed today that I hadn’t responded to this comment, so let me make it clear that you are NOT spamming this blog.

Disagreement is NOT spamming, and will NOT be blocked.

You are welcome to disagree as much as you want, and if it makes you uncomfortable you can do it anonymously as well.

Paresh August 27, 2011 at 10:44 am

To avoid misunderstanding about what I comment about ULIPs please go through minipost on my blog:
http://www.saving-ideas.com/2011/07/key-differences-between-mutual-funds-and-ulips/

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Manshu August 29, 2011 at 5:40 am

Thanks for the link Paresh – it helped me get a better perspective on what you were saying.

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Paresh August 29, 2011 at 9:41 am

Same thanks for you manshu.You provide a great space for different perspectives.Finally,everyone expresses views in his own capacity of thoughts and need not to be right or wrong.

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Furqan August 24, 2011 at 11:22 am
Manshu August 24, 2011 at 8:22 pm

Love the way you have given two opposing views, BTW Sprott has massive gold and silver funds 🙂

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Furqan August 25, 2011 at 9:53 am

Thanks Manshu.

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Beena August 27, 2011 at 10:02 am

Can I apply in Muthoot Finance NCD by Online? B’coz I do Trading through online.

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Manshu August 29, 2011 at 5:42 am

Not every NCD issue is available on all trading clients, so I’m not sure what the answer to that question is.

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new to MF August 30, 2011 at 12:21 pm

i am new to MF , i am planning invest in SBI Gold fund on SIP basis (1000 Rs per month ) .. please give suggention is it good option or not?

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Shankar Garg October 11, 2011 at 12:20 pm

Hi Manshu,

I have read your various posts on Gold ETF and Gold FoF’s and believe me this has helped my understand a lot about this area of investment.
I want to understand one thing, while making a choice b/w ETF and Gold FoF should not we include tax implications also.
as per your post: http://www.onemint.com/2011/04/11/capital-gains-and-dividend-taxes-on-shares-and-mutual-funds/
Gold Fund will be exempt from tax if we hold them for more then an year and if we are talking about long term lets say 10-15 years then tax benefits on FoF will become hudge while Gold ETF will be charged a tax depending on short term or long term.

please correct me if my understanding is wrong.

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Manshu October 12, 2011 at 5:22 am

Shankar,

Thanks and good to hear that – there is no tax benefit in holding gold FoF because that’s not treated as an equity fund for tax purposes. Both gold ETF and gold FoF will be treated like debt MFs as far as taxation is concerned.

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Shankar Garg October 13, 2011 at 1:32 pm

Thanks for the clarification Manshu.

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Amritananda Saikia October 12, 2011 at 11:17 am

Hi Manshu,

Am a new player into the mutual fund market. Recently my CIF from SBI has advised me to go for a SBI Gold fund. But after going through the comments I feel it’d be better to go for SBI GETS instead. Am investing for a period of five years with a thou bucks/month. Plz advice.

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Manshu October 13, 2011 at 5:21 am

If I had to invest my own money I’d go for a gold ETF, personally I’d prefer GS Benchmark ETF for reasons mentioned in this post here, but that choice shouldn’t make too much of an impact so you can choose SBI if that is more appealing to you.

http://www.onemint.com/2011/08/16/gold-etf-in-india-performance-and-volumes-in-last-year/

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Piyush October 13, 2011 at 2:26 pm

Hi,
I wanna know that is their any fund for silver like gold fund, in which one can invest via SIP.

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Manshu October 14, 2011 at 8:21 pm

No piyush there isn’t any.

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want to open a etf account urgently ,,,pls suggest October 22, 2011 at 12:19 pm

i want to open a ETF account pls suggest urgently ,,

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Manshu October 25, 2011 at 5:15 am

There is no such thing as an ETF account. Your demat and trading account that you use to trade shares are to be used for this.

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Jairaj Kishor Bahuguna October 22, 2011 at 12:21 pm

i want to open a EFT account .. pls suggest ..

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sachin December 14, 2011 at 12:52 pm

Manshu,
Can you tell me how to start invest in gold etf?
and also tell how what will be the minimum amount for investment for SIP.
Thanks,
Sachin

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Manshu December 14, 2011 at 11:32 pm

You can invest in it just like shares – have you ever done that because if you have then you already have a trading and a demat account and are all set already.

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sachin December 16, 2011 at 2:39 pm

Manish,

I have icici demat account.
Can you tell me minimum how much amount invest for sip in gold etf?
I wanna to invest gold etf through SIP for 1 year.

Can you tell me how much i will gain with in 1 yr?

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Furqan December 16, 2011 at 3:26 pm

Minimum SIP is of 1 unit of a gold ETF. A unit of most of the Gold ETF is equivalent of 1 gm of gold except for Quantum Gold ETF, which is equivalent of 1/2 gm gold.
Gains/Loss will be proprtionate to the increase or decrease in the price of Gold.

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Kapil Visht May 4, 2012 at 10:19 pm

Have written a blog which compares Gold ETF with Gold Fund Of Funds.
Following is the link
http://goldetfvsgoldfof.blogspot.in/

There are in all 9 points which differentiates the two and helps one decide which avenue to invest in

Reply

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