Gold ETF Versus Physical Gold – Expense Ratio is Hurting

POSTED BY Asav Mansukh Patel ON August 25, 2011 5:52 pm COMMENTS (62)

Hello Friends,

I have a question about gold investing. I want to know that which is better – Gold ETF or a Physical Gold?

I know the all the advantages of gold etfs like – purity, insurance, safety, no wealth tax…etc…

But what I can’t understand about Gold ETFs is – its annual expense ratio.

 

Here are my Questions 

 

1) Can Anyone tell me that how exactly they count the expense ratio? Suppose if one ETF has 1% annual expense ratio than weather it is 1% on gold or 1% on price?

I am asking this question because in case of SBI gold deposit schemes suppose if we invest 500 grams of gold than they give us 1% interest per annum. And this interest is on gold and not on its price. So if I put my 500 gram of gold with SBI gold deposit scheme than I will earn 1% on 500 Grams per year which is 5 Grams per year.

So What I want to ask is, suppose if ETFs charge 1% from me than will they charge 1% gold or 1% of price?

 

2) Suppose if they charge 1% on gold than won’t it hurt my gold? As people say that 1 unit tracks the price of approx 1 Gram of physical gold. So suppose if today I buy 100 units of Gold ETF than it means that today I have 100 Gram of Physical gold right?

Now, after 1 year suppose if they charge from me 1% and deduct 1 unit than it means that they have charge me 1 Gram of Physical gold to put 100 Gram of gold with them so now I have 99 Grams gold only and next year they will charge 1% of this 99 Gram gold means 0.99 Grams and this cycle will keep going on.

3) Now, suppose Today I have 2.8 Lakh rupees and I have a bank locker with me and I also don’t have any purity issue than why should not I buy the physical gold of 100 Gram and put it in a bank locker. In this way,

– I won’t have any safety issue

– I already told that I can manage purity issue by myself

– 2.8 Lakh worth of gold won’t even attract a wealth tax

– And I really don’t need insurance for it.

 

So ultimately the question is that,

Why can’t I go for physical gold rather than Gold ETFs?

It seems that its profitable to become an owner of a Gold ETF Scheme because you will have a steady cashflow of 1% of its gold every year no matter weather the gold price goes up or down?

So Kindly solve my this query.

Thank you in Advance.

62 replies on this article “Gold ETF Versus Physical Gold – Expense Ratio is Hurting”

  1. hit.singh says:

    I am investing in UTI Gold and its just like share. i can purchase any time and sell it like a normal share.
    Is it something different frm what experts are discussingon ETF.

  2. Dear Sandip, please open a joint account where your father ‘ll be first name. Now start investing from this account.

    Thanks

    Ashal

  3. SANDIP GUMTYA says:

    Sir,
    Pl tell me if I want to invest in FD/RD from my father’s acc to get the senior citizen benefit transferring money from my acc to him,how can i do that.Pl explain.

  4. manoj says:

    hi ashal,
    its not agreed factor,but i only asked a simple question,how much return i should expect in physical god in form of coins or bars. Is this right time to buy or i should i wait untill it comes down.
    yes i got my 1.48lac last month only even one of my close relatives had also invested 5 lac and they also got 8 lac in last week of april..m not saying that investor should go for this type of option but its ok if company has shown honesty towards my money.

    1. Ramesh says:

      Who knows?! = simple answer.

      Why not continue in the same company, since it has given you such fantastic returns?

      (From any point of rational view, gold investment is pure speculation, since you do not get any income from it. It is a ‘greater fool’ theory of investing).

    2. Dear Manoj, good to know that you got your profit in your pocket. Considering the fact that 72% return translates into a Gold price of 48K+ if we consider the current price of 28K as the base. Do you feel Gold can touch such a high level in next 1 year?

      You know the answer yourself/

      thanks

      Ashal

      1. Ramesh says:

        Well, irrational exuberance does not place any top limits.

        What makes you think 48k+ is Not possible. 🙂

        – The Devil’s Advocate

        1. Dear Ramesh, I’m not setting any limit. I’m leaving it to the person – dear Manoj, to decide the top limit on his own. That’s why I left to him to answer. 🙂

          Thanks

          Ashal

  5. manoj says:

    dear ashal ji,
    my question was that i invested in a gold investment company http://www.tradeingold.in Rs. 100,000 last year and in return i got total 1,48,000 in one year on monthly basis as per their scheme. Is there any other investment where i can get physical gold in form of gold coins or bars so that i can get atleast 40-50 percent return? or pls suggest me should i continue in this company?

    1. Dear Manoj, is this 1.48L Rs. money in your pocket right now? The very opening of the page with the headline of 72% Guaranteed return is making me to think hard for you & your choice.

      As far as question of physical Gold investment & then earning 40-50% annualized return from it, may God save you from your greed, all I can offer a prayer.

      Thanks

      Ashal

  6. manoj says:

    I have invested in tradeingold.in , i think its the best investment.m getting rs. 1500 per month over 1 lac from last one year..now i m thinking to invest in physical god.. which is the best investment in india ?

    1. Dear Manoj, are you asking to invest in physical gold forms? Say jewelry, coins, bars…………?

      Please clarify.

      Thanks

      Ashal

  7. Dear Saurabh, To make all the matter simple, I’m putting my foot in.

    In my view, never invest in Gold for the sake of investment. If you are married already & having kids or in future there ‘ll be kids, for both cases, visualize how much gold you ‘ll gift to your kids at the time of marriage. Divide that quantity by the no. of months remaining to reach the marriage age. This mly purchase figure is your target. You are not investing in Gold with out a goal & you are not investing in lump sum. The Gold this purchased over the period ‘ll automatically give the benefit of diversification.

    By the way if you are already 30 or 35, ‘ll you keep your Gold investment for next 70Y i.e. your age 100 in demat form?

    Hope it helps to you.

    Thanks

    Ashal

  8. saurabh kumar says:

    Two points:
    1)
    I read this thread from the starting. One point which came across was that in about 70 years, my invested gold in Gold ETF would be halved due to 1% recurring maint charges on NAV.
    But at the same time, on an average Gold ETFs/Gold gives a return of more than 15%. Wouldn’t that help in still covering up for that measly 1% maint charges.

    2)
    And ultimately, am I correct in summarizing that we all agree that the annual maintenance charges of ETF are from the invested value, and not from the actual gold of ours(to simplify)?

  9. Tejaswi says:

    I checked valueresearch site and found that
    Gold ETF: Expense Ratio- 1%
    Gold Savings Fund: Expense Ratio- 0.5%

    This seems to be contradicting the statement that Expense Ratio of Gold Savings Fund is more than Gold ETF.

    Please can any one clarify this. Am I missing something?

    1. Hello Tejaswi,
      Well, the expense ratio of Reliance Gold Savings Fund is 0.5% and this fund invests your money to buy the units of Reliance Gold ETF only so ultimately you will pay 1 + 0.5 = 1.5% expense ration when you invest in Reliance Gold Savings Fund.

      And when you directly invest in Reliance Gold ETF, you have expense ratio of just 1%.
      So basically when we invest in gold savings fund, we actually pay almost double expenses.

  10. Tejaswi says:

    I was checking valueresearchonline.com site and found the following:
    Reliance Gold ETF Expense Ratio: 1.00 %
    Reliance Gold Savings Expense Ratio: 0.50 %

    Does this mean Gold Savings Fund is cheaper which is in contrary to the conclusions derived above?

    Any inputs on this is highly appreciated…

  11. @ Ramesh –>

    Thanks for your nice suggestion. Actually I am not making any class issue of investors.
    Your logic is right. If we want to ride a gold rally than gold ETFs can be good.

    The only thing pop up in my mind was what will happen when the gold will stop appreciating this much?
    Right now its alright that the gold price is going up and up day by day because of global economic slow down.
    But not the all days are same. I sometimes think that what happens to the returns of my gold ETFs when the gold price will be stable or may be start going down and down when the dollar will become strong against the gold?

    At that day, parking money in ETFs won’t actually hurt my gold?
    And yes. its hurting my gold according to the calculations because of 1-1.5% expense ratio.

    ———————-

    Anyways…So you mean to say that Gold ETF is better than physical gold?
    Let’s forget about GDS right now because its out of reach to most of the people.

    So in your opinion, its wise financial decision to pay 1-2.5% annually to Gold ETF and eroding the gold by 50% in 70 years rather than buying a physical gold, going into any purity issue and putting it into a locker.?

    So Can I assume that you will prefer to pay 1-2.5% recurring service charge to keep your gold in ETF rather than buying a physical certified gold and putting it in a bank locker?

    1. Ramesh says:

      For investing for long term, I am against putting money in gold. So, for period of 70 years, or for passing wealth to my grandchildren, I would not put a single paisa in gold. (this is my understanding, but not so relevant to this discussion).
      Gold etf is very liquid and charges you 1%. Gold fund which is a feeder fund for gold etf charges you 2.5% (I would advise never to put money in that).
      Physical gold has got front-loading charges and otherwise, lesser recurring charges in the form of protection/security.
      So, you have to weigh the pros and cons of both the methods.

      Yes, out of the two options, I would prefer to have a gold etf.

      1. @ Ramesh –>

        Hmmm..
        Ok. I understand what you want to say.

        You mean to say,

        – Never invest in Gold Savings Fund because of excessive charges.
        – One can go for either Gold ETF or may be physical gold depending on the pros and cons of the two things.

        Hmmm….
        I am also agree with you. One should never go for Gold Savings Funds.
        One can go for Gold ETF and pay 1% charge if he feels that 1% charge is less than the 3 issues that he has to handle – Liquidity, Purity & Safety.

        And suppose if somebody thinks that he can handle all these 3 issues (Liquidity, Safety & Purity) for less than 1% than he should go for a physical gold.

        So weather one should go for Gold ETF or physical gold really depends on how can he handle the 3 issues effectively – Liquidity, Purity & Safety.

        And according to it one should take decision.
        What do you think?

        1. Ramesh says:

          Pretty much yes.

        2. @ Ramesh –>
          @ Bharat Shah –>
          @ Vinay Shashtry –>

          Sometimes, I feel that why the hell AMCs came with Gold Savings Funds/Schemes? I mean they say that its for the small investors, no demat account is required and the small investors can do regular small amount of savings in the gold.

          But well, they don’t say that the charges will be almost doubled then.
          It is also true that, for small investors there is no other option than this.

          And at the same time, physical gold in such a small denominations is also not available.

    2. Vinay S Shastry says:

      Asav, it is always a tradeoff. It depends on the buyer.

      ETF: high liquidity + realistic price + 1% charges.

      VS

      Physical: bad liquidity, vendor lock-in (ex: jeweller), very high purchase premium (ex: banks), purity management, time (the most scarce resource in life!) and energy, locker charges (1000+).

      For me, the hassle free nature of ETF wins hands down. I don’t have the time nor the inclination to run around shops in search of a better deal, running around in the bank, filling up forms etc…

      1. For me, the hassle free nature of ETF wins hands down. I don’t have the time nor the inclination to run around shops in search of a better deal, running around in the bank, filling up forms etc…

        ———————————–

        Hmmm..,
        So for you it seems that paying 1% charge is very much less costly than handling the 3 issues – liquidity, purity and safety.

        Ok…That’s fine.

  12. Yes.
    I am agree with you Vinay.
    Such kind of expense rate disparity is also seen in debt/liquid funds between retail and institutional investors. This is in every market. I am agree with you.

  13. @ Vinay –>

    Hmmm…
    I agree with you. So its like wholeseller’s discount. If you can invest in bulk, you will get more discount and if you can invest just small amount, there won’t be any discount but you will have to pay full charges.

    So anyone who can invest more than 500 Grams in Gold can go for GDS, 10 grams to 499 Grams – Physical gold or may be Gold ETFs & if somebody wants to save small amount of money every month in gold than he will have just one option – Gold Savings Fund.

    So the Conclusion is that,

    – For Smallest Investor – Gold Saving Funds –> Highest Expense ratio / Charges
    – For Small Investor – Gold ETFs –> Very costly Expense Ratio (1.5-2.5%) &
    – For Big Investors (More than 500 Grams of Gold) – Gold Deposit Scheme (GDS) –> Not any Expense or charges but Rewards and profits only –> 1% on Physical gold per annum so 5 gram interest per year on every 500 gram of gold deposit.

    So It’s better to buy at least 500 packets of Parle -G. Because
    People who buy less than 10 packets Parle-G pays the most and people who buy 11-499 packets of Parle-G pays huge costs while if you buy 500 packets of Parle-G, they will give you 5 packets of Parke-G FREE every year….!!!!

  14. Vinay S Shastry says:


    So in India,
    – The smallest investor do the most expensive investments (Gold Savings Funds)
    – The small investor do the costly investments (Gold ETFs) &
    – The Big Investor (who can invest more than 500 Gram of gold) can do most CHEAPEST and profitable Investment.
    What is your opinion and personal feelings (if any) on this?

    Again, this is just the stock market is just another “market”.

    This is not just India, it’s everywhere.
    It’s not just gold, but all items.

    If you buy just 1 packet of parle-G biscuit, it’s 5 bucks. Now, if you buy a 1000 of those in bulk, you get discount. For the seller, it’s like Re.1 vs Rs.1000 profit. He can afford to let go a bit from 1000, but not from 1 rupee.

    The minority buyer pays the full price. The bulk buyer gets some rebates because of the business he creates.

    1. Vinay S Shastry says:

      Sidenote: You can notice the expense rate disparity very clearly in debt/liquid mutual funds. Check any Retail vs Institutional fund – check the expense ratio and the minimum investment limits in both.

  15. @ Vinay –>

    I am totally agree with all of your arguments. Hats of to you and your intelligence especially your last 2 replies.

    But well, still I have one question which I have already mentioned in the last part of the above post. The question is –

    Q] Don’t you think that in India the small/retail investors pay the highest fees/service charges on every kind of investment/financial products and the big investors have luxury to pay less charges?

    As a Small Investor, I have to pay 1-2.5% expense ratio to invest in Gold ETF and as a very small investor the scenario is worst means suppose if I start SIP in Gold Savings fund than I will have to pay double expenses – the expenses of Gold Savings Funds + The Expenses of the Gold ETFs in which the gold savings fund invests.

    And if I am a big investor (More than 500 Gram of gold) than I can earn 1% interest in the form of gold on it every year means 5 grams per year.

    So in India,
    – The smallest investor do the most expensive investments (Gold Savings Funds)
    – The small investor do the costly investments (Gold ETFs) &
    – The Big Investor (who can invest more than 500 Gram of gold) can do most CHEAPEST and profitable Investment.

    What do you think about it?

  16. @ Ramesh –>

    Ohh…Ok…Ya. You understand the matter. I am sorry for the mis-understanding.

    Well, yes. Your argument is really right.
    When we by Physical gold in any form weather its jewellery, gold coins or gold bars, there is some kind of charge for making it.

    And Gold ETF/GDS don’t have this issue.
    I totally agree with you Ramesh.

    But the only problem with Gold ETF is – Recurring Charges.
    I mean according to the calculations of Vinay above,
    if I park my gold/money in Gold ETF than after 70 years from now, it will be reduced to half means 50% depreciation to park this gold in Gold ETF.

    Of course 70 years is a too long period but well, suppose if I want to pass on this wealth to my grand kids than just to pass on this 100 gram of gold 70 years after to my grand kids, I will have to pay 50 gram to the Gold ETF.

    In that case, why not pay just one time jewellery making charge or may be coin or gold bar making charge to the bank or a jeweller?

    In that case, at least I can pass on full 100 Gram of physical gold to my grand children without any attrition in it?

    Of course, I will have to pay annual 1000-2000 locker charges to store this gold but well, still it will be affordable rather than loosing 50% of my invested gold?

    And what if I have 5 Kg of Gold?
    Of course, you will argue that then park it in GDS and earn interest on it. So I know that GDS is the best option out of these above 500 Grams but what about Gold ETFs?

    Suppose if I park 5 Kg of my Gold in Gold ETF than after 70 years from now, 2.5 kg will be (50%) eaten up by the ETFs and my great grand kids will receive just 2.5 Kg of gold.

    So What is your opinion now about Gold ETFs?

    Don’t you think that they should give the investors interest on it just like GDS rather than charging the expense ratio? After all small investors invest in ETF. Now, if you give big investors 1% interest on gold (More than 500 Grams) than why to punish small investors?

    I have seen that, in India ultimately the people who do the most costliest investments are the small/retail investors. ….Right?
    Because small investors invest in Gold ETFs and Gold Savings Funds and pay lots of charges while big investors like Tirupati Balaji Trust deposit its gold with SBI GDS and earn 1% annual interest on it which is also in the form of gold….!!!!

    What is your opinion on this?
    Don’t you think that small/retail investor is being cheated in India?

  17. Oooofff….!!!!
    I can’t believe this.
    I had never expected this answer. In fact, I had never thought in this way.

    You are correct.
    When I own Gold ETF, I no longer remain a gold investor but becomes the equity investor which is actually the most sound financial advise. (I am really scratching my head right now).

    Great Answer….
    I will definitely remember this answer forever….

  18. @ Vinay –>

    Vinay…Well, I think that now a days its better to be the owner of Gold ETF rather than a robber. Because owning gold ETF means legal licence of robbing gold slowly….

    What do you thin?….. 😉

    1. Vinay S Shastry says:

      Of course it is. Then you are no longer investing in gold, but equities! Which is what most of us already do – owning equity shares/ mutual funds etc.

      Gold is only a very small % of portfolio mostly as a hedge against inflation, and something to soften the fall during economic downturns.

    2. Vinay S Shastry says:

      Also, you might now finally understand what Manish and others have been screaming – equity being the best asset class in the long term. Jago investor … Jago!

  19. @ Ramesh –>

    In case of jewellery, you will have to pay making charge which differs from jeweller to jeweller.
    In case of gold bars and coins that you buy from an Bank (SBI, ICICI, HDFC), these bars and coin will come in tamper proof certified pack and for this they may charge up to 10% higher charge than the current market price. Plus the banks don’t buyback the gold bars and coin they sell.

    So better to buy a gold bars and coins from TRUSTED Jeweller because a jeweler can buy back this gold from you as well as if he is trusted than there won’t be any issue of purity.

    ——————-

    By the way, Ramesh,
    The discussion in this thread mainly around expense ratios in gold ETFs and comparing gold ETF with Physical Gold.
    So if you have any other questions about basics of gold investing than kindly start a new discussion thread and you will get the answer from this community.

    Hope you can understand the matter.

    1. Ramesh says:

      I am just trying to highlight that expense ratio (FMC) is not the only charge which you have to pay. When you buy physical gold, you pay extra charges over and above the gold price (either to the jeweller or bank). In case of bank, you cannot even sell it back.
      In case of trusted jeweller, you are locked in. If you change your city, then you may have problems. Gold ETF/GDS dont have that issue.
      [I understand the matter, dont worry]. 🙂
      Ramesh

  20. @ Vinay,

    Hmmm….
    Nice calculation. Almost accurate.

    According to your calculation, after 70 years there will be almost 50% of reduction of our gold in gold etfs right?

    It means that Gold ETFs are – Assets but they are “Depreciating Assets” just like our car.
    Obviously the car depreciates much faster than Gold ETFs but both of them depreciates and this is the fact.

    The people don’t notice this depreciation only because they are constantly motivated by financial experts and fund houses to invest more and more in these Gold ETFs on regular basis.

    In fact, the mindset of people have been manipulated by telling them that, there won’t be any wealth tax, there won’t be any purity issue and there won’t be any security issue.

    In short, the mind of people is diverted from this expense ratio by throwing other form of information regarding benefits of gold ETFs over physical gold. And that’s why people invest in gold ETFs with proud.

    ——————

    Touch wood… Thanks to god that I have never been robbed by anyone up to now. So you are right that our gold is really safe from the robbers who may rob this entire gold from us and may also hurt us.

    So better to give this gold to the robbers (I am sorry…Its the slip of tongue) …I mean to say Gold ETFs who don’t hurt us physically, don’t rob this entire gold at once from us, give us feeling that we are the owner of this gold and rob this gold from us legally & slowly over a period of 70 years with the permission of government.

    So I am agree with you that Gold ETFs are better than Robbers.

    ————————

    Of course, Gold Deposit schemes are for big investors and not for people at least like me. But well, according to your above calculations only Gold Deposit Schemes (GDS) are appreciating assets because we earn 1-1.5% gold every year from our deposited gold. Of course, GDS is out of scope for many Indians and it may default also but among Gold ETFs & GDS, ETF is the depreciating asset while GDS is the appreciating asset.

    ——————————

    By the way, I am not any gold expert. I am just a Layman about gold and thinking these things from my common sense.
    But well, its really nice to discuss with you….

  21. Vinay S Shastry says:

    You are really comparing apples and oranges. Black money is black only to us. To the swiss, it’s just money. They charge everyone for their service – black, white, or green ;-).

    You pay your security guard to keep your building safe, you pay your local sabjiwala for getting vegetables from market. Why do you think it’s wrong to pay an AMC to do the same with gold for you?

    AMC charges money to maintain “your” property. They don’t lend it out to others and make money (like gold deposit scheme). Your investment is not at risk here.
    While in deposit scheme, the gold is “not yours” anymore. You’ve lent it to SBI. You have risk of default because it’s debt class asset now. The Govt/SBI can default (even though it’s highly unlikely). But in gold ETF, there’s no question of default as it’s just lying safely in their coffers. The gold in there is yours.

    The Gold deposit scheme is indeed very attractive. However, it is not for the common man. If you have half a kilo of gold at your disposal, you’re quite uncommon! 😀

    SBI/govt has their own threshold for the deposit scheme calculating their costs and margins. If you fall within their criteria, well and good, if not, no one is stopping you from lending your gold to someone and making money on it. However, you will have to bear all the lending risks.

    Conclusions:
    1) covered above

    2) Have you ever been robbed? If not, then touch wood! I know people who have been, and it wasn’t good.
    Do you have equipment to verify gold purity? Can you differentiate a pure gold bar and, say, an impure bar with some junk inside but covered 1cm thick by gold?
    Do you have the time to deal with all this?
    If yes, then you can happily hold physical gold.

    3) Please don’t generalise. There’s always a story about how a jeweller cheated with gold purity, or high making charges etc. If you are ignoring all this, I assume you are an expert with gold.

  22. @ Vinay Shastri

    Hello Vinay,
    Thanks for explaining how they deduct the expense.

    I did not know that its not by the cancellation of units. But its on daily basis from the NAV price. I really understand your logic and explanation about how they charge the expense ratio on daily basis.

    Once again thanks for explaining this.

    So it means that the number of units remain the same but according to Bharat Shah, its the attrition in the price of the NAV.
    So today they say that,

    “1 Unit of Gold ETF closely tracks the price of 1 Gram of Gold”

    But I think after 20 years they may say that,

    “1 Unit of Gold ETF closely tracks the price of 0.5 Gram of Gold”.

    So ultimately I own same 100 units but today its worth of 100 grams of gold but after 20 years it may be worth of 50 Grams of gold only…!!!!

    Correct me if I am wrong.

    ——————-

    By the way, I really love your last sentence.

    “Personal opinion: I feel physical mode is not worth the trouble”

    1. Vinay S Shastry says:


      “1 Unit of Gold ETF closely tracks the price of 1 Gram of Gold”
      But I think after 20 years they may say that,
      “1 Unit of Gold ETF closely tracks the price of 0.5 Gram of Gold”.
      So ultimately I own same 100 units but today its worth of 100 grams of gold but after 20 years it may be worth of 50 Grams of gold only…!!!!

      Yes, I too think this will happen, but not in 20 years.
      My crude math says a reduction of 50% will take almost 70 years to happen.

      1*0.99*0.99…n-1 times = 0.5
      (0.99)^(n-1) = 0.5
      0.99^68 = 0.50489
      0.99^69 = 0.49984
      n=70

      1. Vinay S Shastry says:

        Of course, I assume here that the expense is fixed at 1%. In reality, if AUM increases, expense ratio might fall further.

  23. @ Bharat Shah,

    Well, yes. Now you understand what exactly I want to say.
    By whatever means they charge 1-2.5% annual expense ratio/service charge, it is ultimately hurting our gold either by reduction of the units or if not the reduction of number of units than by attrition of the price per unit.

    So actually, parking gold in gold ETFs means paying them gold as a service charge.
    While on the other hand, we know that logically there should be interest in the form of gold when we give our gold to somebody to keep it in custody.

    In fact, a gold ETF can generate income from our gold and give us back as an interest rather than charging expense from us if they want. But surprisingly they don’t do it.

    Actually 1-2.5% attrition in NAV price per year is really small and what they advise is, keep investing regularly in gold ETFs and that’s why people don’t really notice or think that there is a huge attrition in our gold parked in gold ETFs if we look at the scenario after 20 years from now.

    This means that the Gold ETFs say to the Indian investors that,

    – Your Gold is Safe with Us. (Because we won’t let anybody to Rob it because we are the great robbers….!!!!)

    So I have three conclusions.

    1) The best way to Rob gold legally in India is to own a Gold ETF &

    2) Investing and Owning a Physical gold is not really a headache or any issue of safety or purity because we can handle both these issues (safety & purity) very well if we have some basic financial knwoledge.

    3) The best way to own a gold in India is still – Physical Gold (In the form of gold bars ad coins and not the jewellery) and Gold Deposit schemes and not the Gold ETFs or Gold Savings Funds. Because Indians can really manage the issues of safety and purity. I think Indians are that much smart enough since 5000 years that they know that how to buy a pure gold and how to protect it very well by their own.

    What do you think about my these 3 conclusions?

    1. Ramesh says:

      Can you tell us what are the charges over and above the gold price in gold bars, coins and jewellery? And what is the purity of each of them?

  24. Hello Vinay,
    Well yes. I am agree with you. In fact, this is what I want to say. Gold ETF and Gold Deposits both are entirely different things and follow the different business models.
    In gold deposit schemes we give our gold to the bank and the bank actually use this gold to generate income for itself and from this income it gives us interest on gold as well as meet other expenses like custodian, insurance, security, purity…etc…

    While in case of Gold ETFs, they don’t generate any kind of income from our gold and just keep it in their custody. And that’s why instead of paying us 1% interest on our invested gold, they charge 1-2.5% annual service charge (Expense ratio) from us.

    Now, this is very costly in my opinion. Because if I put 500 gram of gold with Gold Deposit scheme than I will earn 5 gram (1% of invested gold) of gold every year and after 20 years I will have 100 Gram of bonus gold so my total gold will be 600 Grams.

    Now, in case of ETFs, if I will invest 500 Grams than after 20 years it will be just somewhere around 400-450 Grams because they charge 1% from me every year as an expense ratio.

    ——————-

    What I want to say is, I am a common man. I don’t care what business model ETFs and Gold Deposit Schemes follow. I only care for my gold. On the one hand Gold deposit schemes give 1% interest on gold and on the other hand ETFs charge 1-2.5% service charge /expense ratio.

    So don’t you think that parking money in gold ETF is like parking Black money in Swiss Bank?
    (I am sorry…I should not talk about black money anywhere in public. But well, let me tell you that I am the supporter of Team Anna…. ; )
    I mean when we park black money in Swiss Bank, we have to pay them service charge.
    Now, this is well understood because after all its a black money.

    But what about my gold? It’s not black money at all?….
    Than why should I pay service charge for parking a gold in gold ETF?
    When logically I can clearly say that actually I should get interest on my parked gold (Wherever…. weather in gold ETF or in Gold Deposit schemes) and not I have to pay any service charge/expense ratio for investing my gold….

    What’s your opinion on this?
    Thx for your timely reply….

  25. Vinay S Shastry says:

    Now, coming to your Deposit scheme…

    It is completely different from ETF. ETF is just a form of holding (instead of a gold bar/coin/jewellery). While a deposit is lending – you lend it to the bank.

    ETF : Gold Deposit is comparable to Cash : Fixed Deposit.

    The bank will probably use your gold to add assets to its sheet and lend money based on it. (Just like they take money from depositors and loan it to others at a higher rate.) It’ll be all on paper though – i.e. your gold will not be touched – just taken for value addition.

    1. Vinay S Shastry says:

      Correction: I just read that SBI will melt the gold deposited and give you a certificate. So it’s not just on paper.

  26. Vinay S Shastry says:

    You have to understand that Gold ETF is just like any “mutual fund” (but with stricter regulations about storage, quality etc.).

    Also, 1 unit of gold ETF is not exactly 1g gold. Most funds hold 0-5% in cash/money market instruments (to facilitate redemptions, or manage inflows etc.).

    Expense incurred is reflected daily in NAV.
    So, 1% pa is deducted on a daily basis from the NAV (see AMC site for NAV details) just like any other mutual fund. (see more about expense ratio here: https://www.jagoinvestor.com/2011/07/expense-ratio-mutual-funds.html)

    A very crude example:
    1% per annum = 1/356 = 0.00274% per day

    Say gold etf nav is 1000, and assuming there is no movement of gold prices (highly unlikely), your next day nav will be 1000*(1-0.00274%) = 1000*0.9999726 = 999.9726

    This is true with physical gold too. But expense ratio will vary as you will be managing it (bank charges, your time consumed etc. – i cannot put a value to this, only you can.).

    It is true that your investment value will get eroded over the years if gold price remains “constant” (or falls). This is quite unlikely given our current circumstances (bad economy, inflation etc.) But what do I know? Just speculation!
    In any case, the number of ETF units in your possession units will not reduce, but the NAV will (as explained above).

    You also have to understand that you are “investing”. i.e. hoping that in the long run, the gains gold makes will be more than (or at least equal to) inflation+maintenance charges (expense ratio of ETF, locker charges of bank, your precious time used, etc.).

    In the end, it depends on you. If you feel 1% charges is significantly more than what you can manage yourself for the amount of gold you plan to buy, then of course you can go for physical mode.

    The difference in charges – etf vs physical is: in etf, it is taken from existing investment (nav of units), while in physical, you pay extra.

    Another crude calculation… if you invest “more than 1L in gold”, then 1% will be more than 1000, while bank locker charges will be fixed 1000 rupees (assumption from your example). Ignoring the time spent, purity issues, finding a buyer, seller, and other invisible charges, physical form wins in a pure expense ratio competition.
    (Personal opinion: I feel physical mode is not worth the trouble.)

  27. @ Vinay,
    Another thing is that. I can understand that lockers also have annual recurring charges say Rs.1000 per year. So suppose if I put my 100 gram of physical gold in a bank locker for next 20 years than I will have to pay 20,000 Rs for the next 20 years right?

    Now, what my concern is,
    suppose if I put the same 100 gram gold in gold etf than I will have 100 units of Gold ETF right? because 1 unit closely tracks the price of 1 gram of physical gold ok?

    Now, suppose if they deduct 1% nav every year than well, actually what will happen after 20 years is,
    It will look something like this.

    Today I have 100 gram (100 units) of gold that I give to the asset management company so on the first year they will deduct 1 unit (And that’s 1 gram of my gold) so now 99 grams/units remain. Now 1% of 99 means 0.99 and so on…..

    So probably after 20 years I will only have just 80-85 Grams of gold……!!!!!
    I mean I will only have 80-85 Units of this Gold ETF after 20 years from now……

    Now, in that case AMCs will be still in their business but I will be out of my own business or may be retirement…!!!!

    ————————–

    Now take the other scenario.
    Suppose if I have 500 Grams of gold (Of course, having 500 grams of gold is a big thing and not the everyone can do this. But let’s just assume this thing.)

    Now, I deposit this 500 gram of gold with SBI gold deposit scheme and not with gold ETF.
    And I get a gold certificate of SBI gold deposit.

    In that case, SBI will also give me 1% interest on gold per year for 3 years of deposit and 1.5% per year for 5 years of deposit.

    Well, Yes. It’s 1% interest on gold and not on its price.
    So it means that 1% on 500 gram of gold per year means 5 gram of gold every year….!!!!

    So I will earn 5 gram (1%) of physical gold every year on my 500 gram of gold deposit.
    There is no security issue, there is no headache, there are no insurance charges, there is not any wealth tax or purity issue just like it.

    ————————-

    The only hurdle is that, the minimum deposit amount is 500 grams of gold which is out of reach of most of us.

    ————————-

    But my question to all of you is,
    Why such a huge difference in Business models of two gold schemes?

    On the one hand, Gold ETFs charge expenses from us to keep it in their custody and on the other hand gold deposit schemes give us 1% physical gold as an interest to us every year. Both of these are equally same things. The only thing different is the business model.

    So any logical mind can have a question like me that,
    why don’t we get 1% interest in the form of gold in gold ETFs?
    For me, parking money in gold etf means putting money in bank savings account and paying them 1-2.5% per year as a service charge….!!!!

    Don’t you think so?

  28. Hello Mr. Vinay,
    Thanks a lot for replying my query in detail. Now, many things are clear to me from your answer.
    I can understand that the AMCs have to stay in business so they will have to charge some fee from their clients/investors.

    By the way, Do you have any idea that How exactly this 1% fee is deducted annually?
    I mean suppose if I buy 100 gram of gold (100 Units) through ETF. Now, how they deduct their expense fee?

    1) Suppose the gold price is Rs.30,000 per 10 Gram and I buy 100 Grams/100 Units so I will invst 3 Lakhs. So at the end of the year 1% of 3 lakh is 3000 so will they deduct 3000 from my investments or

    2) I own 100 units (100 Grams) of Gold ETF so 1% of 100 units/100 Grams is 1 so they will deduct 1 unit from my investments?

    Both of the above things look almost the same. In fact, in second option deducting 1 unit means deducting 1 gram of gold which ultimately means Rs.3000 only if the gold maintains the same price during the year which is highly unlikely.

    So I want to know that weather they charge 1% of gold or 1% of average gold price through put the year?

    Kindly explain.
    Thx….

  29. Vinay S Shastry says:

    Don’t forget the recurring annual bank locker charges

    If you can keep your charges below 1% for maintaining physical gold, including the time spent and headaches of maintaining it, and when the time comes, finding a buyer for it, then sure you can keep it in physical form.

    For most people, the 1% is acceptable fees compared to the headaches of managing purity, insurance, safety, and finding a proper buyer and seller.

    About constant income, yes, brokers, AMCs will always get it. They’ll have a decent cash flow as long as they have enough people holding their schemes (applies to everything, not just gold). This is how they stay in business – make a living. How else can they make money? Surely you can’t expect someone to take care of your assets for free!

    About owning an AMC, how many people want to own an AMC/brokerage firm etc.? Everyone has different aspirations/dreams in life.
    If you want to own and manage an AMC, then good luck to you sir!

    If you decide to go with an etf, choose one with lower charges (ex: gs goldbees , quantum gold etf both have 1%), and one that’s more liquid (traded more), so you can sell easily when the need arises. Do not blindly trust the seller’s name (SBI etc.).
    The stock market is a “market” just like your local one. You won’t pay 1.5% extra for the same item. Would you?

    PS: If you are wondering why SBI, other gold etf have higher charges, it’s very likely because they are new and have very few investors. Once they gather enough AUM, they can reduce the charges.

  30. Hello Mr.Bharat Shah,
    Thanks for your reply.

    Well, still its unclear because 1% Asset Under Management means Gold only. This is because here the asset under management is gold only.
    Now, suppose they say that they will charge this 1% by deducting units than ultimately they are deducting my gold only.
    If 1 unit of gold ETF equals to 1 Gram of Physical gold than by deducting my units as an expense ration they are actually hurting my gold only and nothing else.

    You are right that expense ratio is not fixed. And that’s why in my example I have taken minimum expense ration as an example and that is 1%.

    The Gold ETFs like SBI GETS (Gold Exchange Traded Scheme) and many others have 2.5% expense ratio.

    If we consider the expense ration 2.5% and they deduct my units than it will surely eat up my gold investment…!!!!

    1. bharat shah says:

      @ashav mansukh patel
      i personally totally agreed on your three conclusions. in fact , before 6 months, i seriously thought of shifting to some investment in gold biscuit apart from jewelry gold , at that time i have thought of (mental arithmetic! ), BUT NOT deep as you all discussed , even though i thought to buy physical gold!
      one more thing i like to add that as i remember from some article on gold etf that etf gold is also not preserved by the amc itself, but it is remaining with the custodian, and there is also suspected that there are chances not to have enough gold for etf units it representing. as i remembered , this suspect is with regard to foreign country etf, i may be incorrect. but my point is , there is risk associated with any investment.

      1. @ Bharat Shah

        Well, yes. I now firmly believe that my these 3 conclusions are true. In fact, before starting this I also did not expect that this post will go like this. Nothing was pre-planned and as discussion started more and more logical arguments started coming in my mind.

        Basically we people are bombard with the information like,

        – Gold ETF is safe
        – There is no issue of purity
        – No security issues
        – No wealth tax &
        – Blah…Blah…Blah…

        And we started thinking that now we become financially smart. Unfortunately, the fund houses (AMCs) are just highlighting one side of the coins and try to hide the other side of coins and that is – Expense Ratio.

        AMCs won’t tell or highlight in their marketing brochures that, the investor will have to pay recurring 1-2.5% expense ratio until he stay invested in the fund.

        AMCs also don’t tell the investors openly that their gold will be eroded.

        They just tell the half truth – Your Gold is Safe with us from Robbers.
        But they won’t complete the sentence (Because we are the legal robbers of your gold).

        On the one hand, Gold Deposit Schemes give 1% annual interest on gold to the big investors and on the other hand Gold ETFs charge service charge/expense ratio for investing in Gold ETFs from the small/retail investors.

        So it’s like being rich means getting rewards and being “Aam Adami” means paying higher expenses and charges.
        I don’t think that its a fair game.

        And on the top of this, Gold Savings Funds.
        Gold Savings Funds claim that investors can invest small amount of money in it.
        They also say that we do care about the need of the small investors but they don’t say that the same small investor will have to pay highest charges for investing in Gold Savings Funds.

        Means if a small investor invests in Gold Savings Funds than he will not only pay the expenses of that gold saving fund but will also pay the expenses of the gold etf fund also.

        And still the Gold Savings Funds will say with proud in their advertisement that,
        We care about small investors.

        If they really care about small Indian investors than why just not they change their entire business model and give 1% interest on our gold investments like GDS?

        India really needs a revolutionary change in Gold ETFs & Gold Savings Funds Industry…

        What do you think?

        1. bharat shah says:

          @asav mansukh patel

          indeed1
          AT LEAST SBI , WITH NECESSARY PERMISSION FROM GOVT. IF NEEDED, SHOULD START TO ACCEPT @50GM. /100GM. BISCUITS FROM SMALL RETAIL INVESTORS.

          1. @ Bharat Shah –>

            Well, yes. Your logic is right. At least SBI should start 50/100 Grams of Gold Deposit schemes. This can spread real financial awareness. I mean suppose if someone deposits 100 Gram of gold than rather than charging 1 – 2.5 gram of gold per year, he will at least earn 1 Gram of gold as an interest every year.

            Not only this but people who invest in Gold ETFs and Gold Savings Fund will automatically understand that how costly investments they are in comparison to the GDS?

            Basically people are falsely motivated to invest more and more in Gold ETFs so that they can’t notice such a small drainage from their gold investments.

            So rather than paying interest rates, these ETFs charge expense ratio / service charge from us. It’s just like parking our money in Swiss Bank and paying a service charge on it rather than earning interest on it.

        2. bharat shah says:

          further to my earlier comment ,i found following from a article ‘gold options’by Raj Pradhan’ on ‘moneylife.co.in’ site dtd.7 april, 2011:
          There are worries—unfounded, as yet—whether gold ETFs have enough gold backing them. Gold ETFs are backed by gold which is kept with a custodian of repute. Recently, SEBI has made it mandatory for auditors of gold ETF schemes to physically verify the gold which gives a reasonable assurance to investors that gold ETFs are backed by physical gold.
          in the same article, i found that interest rate for 5 yrs is 1.5%, and not 1% yearly. however it is not bad.

          1. @ Bharat Shah –>

            Well, yes. for 5 years its 1.5%, for 3 years deposit its 1% and for 4 years its 1.25%. But well, its 1.5% per annum for 5 years of deposit. So its not like you will earn just 1.5%% gold in entire 5 years on your 500 grams of gold deposit. You will earn 1.5% gold every year for 5 years and that is 7.5 Gram gold per year…!!! So this is even better.

            You are right that its a question by SEBI that, weather gold ETFs are fully backed by physical gold or not? But that’s w different matter.

            Here my argument is that,

            suppose if I put 1 kg (1000 Grams) of gold in Gold ETFs than they will charge annual 1-2.5% from me from my NAV and that’s 10-25 Gram of Real Physical Gold….

            And if I park 1 kg (1000 Grams) of gold in SBI gold deposit scheme for 5 years than I will earn 1.5% gold every year on it and that is 15 Grams of gold every year….!!!!

            So what my question is – why can’t gold ETFs change their business model in the benefits of Indian Investors?
            I think when the ETFs and Gold Savings Funds will start giving interest on it, their actual asset size will be doubled, tripled or may be quadrupled.

            What do you think?

            1. Ramesh says:

              @Asav
              You are going round and round.
              Gold is a commodity and except for jewellery use, it is otherwise largely useless.
              Moreover, its rise over the last 70 years (the period in which the ETF charges will cut it in half), has been in 6 short phases (i agree, the last phase has been rather long, may go even longer, cant say about that). So if you are unable to identify the impending rising phase, investment in gold is not going to make you a lot of money.

              Second, gold etf’s purpose is to get your money and put it in gold. Money>gold with liquidity.
              While, gold deposit scheme’s purpose is get your gold and give you money (whether it is in cash or in gold). So, it is Gold>Money. Liquidity is quite restrained (0.5% which translates to one-third to half of the return, if i have understood correctly).
              You see, both the things are exactly opposite and you cannot compare them.

              Also, remember, the gold etf are open-ended and available to everybody all the time. Gold deposit schemes are closed-ended, and govt opens it as it requires.

              In the end, if you want liquidity and want to ride the gold wave, go for etf. If you want to lose your liquidity and you have so much money to put in gold and the scheme is open, go for GDS.
              There is no point in creating a class issue about small investors being robbed and large investors being only and only rewarded.
              Ramesh

        3. bharat shah says:

          @asav mansukh patel
          again you are right!the interest rates are cumulative , and not simple as i thought. it could be @7.72gm per 100 gm deposited for 5 yrs.interest would be given in cash, principal is return in form of gold or cash as per your choice. moreover such capital gain is tax free, and gold deposited is not subjected to wealth tax. this is only for knowledge about the scheme and i am not intending to argue in favour/ against the scheme or gold itself!

  31. bharat shah says:

    i am not sure but it is 1% of the asset under management, i.e. as gold price increases it would increase, but not 1% of gold it manage at that time. definitely expense ratio would eat some of your growth, and it would more noticeable/ burning when gold price would go down. if other benefits ignored and you have no problem in picking pure gold, physial goldcould be better. some jewellerspay interest on loaning physical gold.expense ratio is not fixed and vary subject to sebi limit

    1. bharat shah says:

      @ASAV MANSUKH PATEL
      first let me confess that my first reply was due to wrong mental arithmetic! you are 100% correct. i think, what would happen after 15-20 yrs, though you will hold the same no. of etf gold units, the price of such units would be 15-20% less than physical gold 1 gm/1/2 gm gold, provided now etf unit price be the same as 1gm/1/2 gm gold , as the case may be! now a days locker possession is common, and mostly not involve extra cost or the cost of such holding would be less, and if possible, better to put in sbi. if one can not buy 500gm at a time, there is alternative to buy by paying monthly installment from mnc , a chennai base refinery. of course it costs 3-4 % more as i remembered.

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