Mutual Funds Vs Gold saving Funds

T C S REDDY
ASSOCIATE PROFESSOR SMEC

A mutual fund is a type of professionallymanaged collective investment scheme that pools money from many investors to purchase securities. Gold Saving funds are nothing but mutual funds which invests majority of its corpus (90%-100%) in Gold ETFs (of the same sister company), a small portion might also be in money market instruments or some short term debt products.

TYPES OF MUTUAL FUNDS

Open-end funds Closed-end funds Unit investment trusts

Open-end mutual funds buy back their shares from their investors at the end of every business day at NAV. Closed-end funds issue shares to the public and listed in a stock exchange. Investors must sell their shares to another investor in the market.(@NAV or Premium or Discount) UITs issue shares to the public . Investors can redeem shares directly with the fund (like open-end fund) or they may also sell their shares in the market

EXCHANGE-TRADED FUNDS (ETFS)

ETFS
They have characteristics of both closed-end funds and open-end funds. (demat a/c required) ETF holds assets such as stocks, commodities, or bonds. An ETF does not have its NAV like a mutual fund does. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price deter mined by the market. But MFS traded at end of the day.(NAV)

GOLD ETFS
These are financial products which invests in physical gold and tracks its pricing on day to day basis. It doesnt not allow investments without a demat account. Trade these ETFs through stock exchange. These ETFs collect charges (expense Ratio) from the investor.

They are nothing but mutual funds. But which invests majority of its corpus (90%-100%) in Gold ETFs (of the same sister company).Ex:Quantum Gold Saving Funds. The underlying investment is still gold, but not directly. a small portion might also be in money market instruments or some short term debt products. No need of demat account. pay charges two times -for Gold saving funds and also for gold ETFs. One important point is that do not confuse gold saving funds with gold mutual funds which are mutual funds investing in gold mining companies, they are totally different.

E-Gold trading is becoming an increasing preferred way of gold investing. Following are some pertinent facts about e-Gold. E-Gold has been introduced by The National Spot Exchange Limited (NSEL) as part of E-series investment products in commodities that also includes e-Silver. E-Gold units, where one unit equals 1 gram of physical gold, is purchased and sold through the spot exchange just like shares. There is the option of investing in small quantities in demat account, the minimum being 1 gram of eGold.

Continu
There is also the liberty of taking physical delivery of gold through the exchange whenever desired. It's better than gold jewellery as you don't lose out on any jewellery making costs. You don't need a locker as e-gold is held in demat form, so it's 100% safe and has lower holding costs E-Gold is 99.9% pure gold and you have the flexibility of buying more or selling your e-gold at any time. It's 100% liquid

CHRGES
A -CHARGES =1% B - CHARGES =0.5%

Which is better?
CRITERIA
CHARGES DEMAT REQIRED?

GOLD ETFS
Expense Ratio around 1%. YES

GOLD SAVING FUNDS

Gold Saving Funds : 0.5% Underlying ETFS : 1.0% NO

TRADABLE IN THE MARKET?

SIP SET UP?

YES

YES (Now tradable)

YES

NO

What is Expense ratio ?

As an investor we just buy and sell mutual funds, but in the background there are many expenses which a mutual fund (and even ULIPs) has to incur. Fund management fees, Agent commissions (trail commissions), Registrar fees, and selling and promoting expenses. As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.

Expense Ratio With & Without(Show the table)

Explanation
Expense ratio is cut from your investments on daily basis from mutual funds and only after that NAV is published and thats how you pay expense ratio. For Ex: If you have invested Rs 1,00,000 in a mutual fund whose expense ratio is at 2% and suppose your mutual fund saw a growth of 0.5% in a day, which turns out to be Rs 500. You NAV wont be 1,00,500. Before that you will have to pay 2%/365 (thats 365th part of 2% as charges, as its for 1 day, remember 365 days in a year) and that would be, Rs 5.48. Hence, final value of your investment would be 1,00,000 + 500 5.48 = 1,00,494.50 thats 0.4945% increase and not 0.5%

What is Demat a/c

BANK A/C Gives & receives money

BUYER

TRADING A/C

STOCK MARKET (BUY &SELL)

DEMAT A/C (Stores the securities)

Demat Account : Account where your Shares are stored in electronic form.
Trading Account : An account which is used to place orders for Buying and Selling of shares . So Trading account is an interface between your Bank account and your Demat account , when you buy something , Trading account takes money from your Bank Account (Its already taken from your Bank account and saved in Trading account) and buys shares and stores it in your Demat account . When you Sell something , Your trading account takes back the shares from your Demat account and Sells them in Stock Market and get back the money and that goes back to your Bank account (actually you manually transfer it to Bank account from Trading account most of the times .

Demat account = Dematerialized Account'

the process to convert securities from physical format in electronic format is called dematerialization.

DP=Depositary Participant (banks,sharekan ltd) like open an account with a bank, Demat a/c is opened. No need of minimum deposit of securities. 4 simple steps for demat account opening: Select & approach a certified DP . Fill up opening form given by the DP. Attach xerox copies > 1.Pan Card 2.Residence proof 3.A passport size photo

Demat a/c Opening Charges (may or may not) Demat a/c Maintenance Charges: (some brokers may charge a cost every month or quarter or year) Custodian Charges: (This fee is charged for holding
securities in the account on a monthly basis. )

Transaction Charges.

In addition, the DP also charges a fee for converting the

shares from physical to electronic form or vice-versa.

DP will open it within 15 days of form submission. The DP will allot you a unique BOID (Beneficial Owner Identification) Number, which you quote for all future transactions.

SHARE CLASSES FOR FUNDS SOLD THROUGH BROKERS

Class A shares usually charge a front-end sales load together with a small 12b-1 fee. Class B No front-end sales load. Instead they, have a high contingent deferred sales charge, that declines gradually over several years, after some time they convert into Class A. Class C shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years. They do not convert into class A shares. Class I very high minimum investment requirements.known as "institutional" shares. They are no-load shares. Class R for use in retirement plans. Do not charge any loads etc.,

DEMAT ACCOUNT BENEFITS .

Demat Account is safe and convenient way to hold securities. No theft and loss. There are no chances of signature mismatch because most of the process of buying and selling dematerialized securities is electronic. There is no stamp duty on transfer of securities. (as against 0.5 per cent payable on physical shares) Reduction in transaction cost. Demat Account helps in easy settlement of the ownership title of securities, and provides easy receipt of public issue allotments. No odd lot problem, even one share can be sold thus there is advantage. Change in address recorded with DP gets registered with all companies in which investor holds securities.

LOADS
Front-end load : Also known as Sales Charge, this is a fee paid when shares are purchased(class A). Back-end load: Also known as Deferred Sales Charge, this is a fee paid when shares are sold. 12b-1 fees: Some funds charge an annual fee to compensate the distributor of fund shares for proviThe 12b-1 fee is paid by the fund and reduces net asset value.

NET ASSET VALUE (NAV)

NAV= Total value of all the cash and securities in a fund's portfolio - any liabilities / the number of shares outstanding.