Subbu's Solutions - 27 May 2011

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 Posted by Subbu's Solutions on Friday, May 27, 2011

1. Sir, I have been buying Gold ETFs by SIP trough ICICI Direct who charges me brokerage of roughly 1.35% per one unit /gram. In addition to this, as we know, fund itself charges 1% as its asset management fee and includes in the pricing. Lately new "fund of funds" gold funds are being launched who charge 0.5% as amc expense to the fund in addition to, of course, another 1% charge which Gold ETFs include in their pricing. Again when I have to sell the ETF I will have to bear another 1.35% or so brokerage in case of direct Gold ETFs where as the later will not charge any exit load after say 1 year lock in. My query is which is the better alternative among the two (as it appears to me that cost-wise Fund of Funds is cheaper than ETF) assuming that I already have a D-Mat account and further I intend to invest monthly in one gram gold unit (approximately Rs. 2000/-) over the next 3 years? - Thanks Francis A D Souza

Dear Francis,

Thank you for posting this question. Given the economic and political uncertainty surrounding us, gold has become a must have safe haven asset in our portfolios, making your question very relevant.

Choosing a suitable fund between Gold Exchange Traded Fund (ETF) and Gold Fund of Funds (FoFs) depends on the investor’s convenience and the amount he wishes to invest.

Gold ETF invests in physical gold and tracks the price of gold as closely as possible, while Gold FoF invests in the units of the underlying Gold ETF. Gold ETF is perfect for an investor who holds a Demat account, and can invest in lumpsum amounts depending on the actual price of gold (since you are required to purchase a minimum of 1 gram of gold at the current gold price in most mutual funds). The plus point of investing through Gold ETF is that you can buy/sell gold at market price of the Gold ETF unit and the chances of tracking error are kept to a minimum. In simple terms, Tracking Error is a measure of how closely an Exchange Traded Fund (ETF) follows the index to which it is benchmarked. The lower the tracking error, the closer are the returns of the fund to that of the target Index.

The annual charges for a Gold ETF are lesser than Gold FoFs but you may incur brokerage charges from your broker since you are directly investing on the National Stock Exchange (NSE). For an investor who can dedicatedly spend time to trade and have the money to invest, the Gold ETF is a sound option.

The Gold Fund of Funds scheme is appropriate for those investors who wish to invest in gold but do not have a demat account and/or want to purchase gold through a disciplined investment of a certain amount, rather than pay in lumpsum. In a Gold FoFs, you can invest through the SIP route where you invest a minimum of Rs. 500 per month which is not possible in a Gold ETF.

If you plan to purchase 1 gram of gold unit every month, it would be expensive to allocate your investments through Gold ETFs. In such cases, Gold Fund of Funds (FoFs) is a better option compared to Gold ETFs. However, it's important to note that there will be a second layer of expenses i.e. 1% charged by the underlying fund (Gold ETF) and recurring expenses of the FoFs. Also, since the tracking error (if any) would be higher in the Fund of Funds, it could diminish your returns to some extent.

Benefits of investing in Gold ETFs

Benefits of investing in Gold Fund of Funds

Both the choices of investments have their own pros and cons. But, not considering Gold ETFs for investment on account of high brokerage is irrational since some costs get adjusted over a period of time. In a Gold Fund of Funds scheme, the underlying fund may buy the units from the exchange they are listed on, for which they would pay a brokerage. But, although this brokerage amount would be much lower, it would be passed on to you through the NAV. So, at the end of the day - you should be able to make decisions depending on your investment capacity and time horizon.

2. Hi, I in last sunday's business line i read an article stating that a fund with a large corpus in always advantageous than a fund with a smaller one. I find it difficult to understand. Does size matter? In my view bigger size is a hindrance what's yours? - B.ARUN KUMAR

Dear Arun,

Thank you for sending us your query. The size of an AMC backing its performance has always been a debate ever since the Mutual Fund industry began. But, blindly believing your distributors or portfolio managers who say "larger the fund's AUM, the better the performance" may not help you make healthy investments.

One thing is clear- all mutual funds invest in the stock market making each mutual fund equally vulnerable as the next. But, what you should ensure is that the fund you invest in relies on a disciplined research process and has an investment philosophy that you can understand.

One should invest in a fund, not because of size, but because it matches your needs and your ability to take risks as a long term investor in the stock markets.

For a better understanding of why the size of a fund should not matter, feel free to go through this presentation.

On a parting note, here are a few pointers you can use:

Also recognize that every investment strategy of a fund has a capacity limit. So, if the capacity of the fund you have invested is Rs 100 and the fund collects more money than this, then the performance is likely to suffer.

Hope this response has answered all your queries!

3. Dear Sir; I had invested in mutual fund schemes. Earlier the statements of the accounts used to come half yearly and a man remains in touch, but from a considerable period companies have stopped the sending of account statements. Unfortunately I lost my records of holdings and unable to know in which scheme/company i have invested. Would you like to help me in this regard, how can I get informations of my investments? - shamshad anis

Dear Shamshad,

It's unfortunate that you have to face such a situation. Here are a few methods you can try, to receive your statements and other details from the companies:

This experience could give you a chance to ensure you keep records of your investments in the future for reference- after all; it is your hard earned savings. Another feature you could use to reduce the paperwork is to consolidate your folios. Through this facility; you can have a record of all the schemes of a particular mutual fund house in one portfolio! Ask your mutual fund house for further details on this facility.

There are a number of financial websites that help you create Online Portfolios for free. This would be an easy and convenient method to keep a track of your investments. You could open your accounts at any of these financial planning portals: Personalfn.com, MoneyControl.com or ValueResearchOnline.com

Best of luck and happy investing!

4. Which mutual fund scheme is suitable for retired employee for regular & study returned without any risk of capital - Gurmit Bhatia

Hello Gurmit,

Thank you for writing in to us. As the saying goes, you can retire in body but never in mind! Keeping with that spirit, it is the best that you invest in liquid fund schemes as they provide you with regular and steady income without worrying about your capital being eroded. Liquid funds seek to generate adequate returns with low to moderate levels of risk by investing in money market instruments and other short term debt instruments with a rating not less than AAA or its equivalent.

5. Can I swift from one fund to another fund during the market up-down? Is there any charge for this? Will this affect fund return? - Dr. Gambhir Singh

Dear Dr. Gambhir,

Yes, you definitely can shift from one fund to another during any market condition provided that you are doing so keeping in mind the risks that could be involved. Usually, investors shift from one mutual fund to another in search of better returns. But, when you exit a fund/scheme, you incur an exit load charge (in most cases, if you intend to leave the scheme before completion of 1 year) which lowers your returns and you also face Reinvestment Risk i.e. the risk that the reinvested amount may earn lower returns. For further details on the exit load structure, you can refer to the offer document of the mutual fund.

If you switch from one fund to another frequently, it will affect your fund returns as each time you exit a particular fund, you will have to pay an exit load. Also, if the transactions are short term in nature you may have to pay capital gains as well, depending on the scheme you have invested in.

You can reach your goals without losing or reducing your earnings.	Frequent switching lowers your returns

Finally, each time you purchase or redeem, you are not allowing your capital to benefit from compounding. The slide below could help you understand the power of compounding.

A small saving, a modest fortune

Let's assume you save the Rs.30 you usually spend every day on that cup of coffee at your local cafe. Over a period of time, you will notice that it adds up to a lot!

That Rs 30 every day adds up to Rs 900 a month, which becomes Rs 10,800 every year! A modest saving of Rs 30 a day, compounded at an annual rate of 10%, over a period of 25 years can actually result in Rs 11, 84, 590. And a 10-15% of return rate is really quite plausible. It's just a matter of simple discipline!

Now, here's a look at what you can buy with this huge sum:

How about a high end car!

A vacation abroad?

Or maybe even that dream home!

You don't need to be a mathematic genius that if you carry out 5 trades/switches, and manage to make 4 really good switches that have given profits. But, if your 5th trade happens to be a terrible one, you stand to lose even the earnings you made on the other 4 trades.

There are also high chances that you may miss investing when the market is in a downturn or fail to sell in an upturn- this again will affect your returns. Overall; shifting from a fund to another frequently is not advisable.