Why is expense ratio important while investing in gold funds?

To earn capital appreciation over the long term and target financial goals through systematic and disciplinary investing, one should consider investing in market linked schemes like mutual funds. Mutual funds pool resources (money) from investors and sharing a common investment objective and invest the capital raised in accordance with the scheme’s investment strategy.

If you invest in equity funds, your finances will be exposed to market volatility and even though equity markets fluctuate from time to time, they are known to offer commendable returns over the long run. Debt funds on the other hand offer stable returns without taking any added risk. If you already have these two funds in your mutual fund portfolio and are looking for further diversification, you can consider investing in gold mutual funds.

What are gold mutual funds?

Gold funds are open ended mutual fund schemes who invest majority of its investible corpus in gold ETFs or gold bullions. These are an ideal investment tool for anyone who wants to invest in the precious yellow metal without having to deal with the hassles of safeguarding physical gold. Investors can now invest in digital gold through gold funds and continue the age long tradition of investing in gold but without any aggravations. Anyone who wishes to get exposure to gold as an asset class and earn capital appreciation can consider adding gold funds to their investment portfolio.

What is expense ratio?

The per unit cost for managing a fund is referred to as its expense ratio. The Asset Management Company has to bear recurring expenses like management fees, administrative costs etc. to ensure that the fund is able to run smoothly. What the AMC does is that it recovers these expenses by charging annual expense ratio to mutual fund investors as management fees. An expense ratio is nothing but the annual maintenance fee payable to the fund manager for managing the fund. The expense of a fund that has small assets can be high because the AMC has to meet the expenses by managing a fund with lesser assets. If the asset under management of a fund are reasonably high, that particular fund might have a low expense ratio.

Why is it important to invest in a gold fund with low expense ratio?

Investing in a gold fund with a high expense ratio will badly impact the returns. This is why it is important to invest in a gold fund with low expense ratio. As of now market regulator SEBI (Securities and Exchange Board of India) has capped total expense ratio (TER) at 2.5 percent for mutual funds. What this means is that no fund house or asset management company can charge investors with an expense ratio higher than 2.5 percent under any circumstances.

Since the expense ratio is deducted from the total returns earned by the scheme before handing them over to retail investors, over the long term one might end up giving a large chunk of their earned profits if they invest in a gold fund with a high expense ratio. Since most of the gold funds invest in gold ETFs, they ideally should carry a low expense ratio. Those who are keen on investing in gold funds should compare the expense ratios of several schemes to determine which scheme has a feasible expense ratio.

Gold funds are an ideal investment tool for anyone who wants to invest in gold as a commodity. However, the returns of a gold fund may vary depending on how the fluctuations in the international gold prices impact the underlying assets the scheme.

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