In the realm of gold investments, many investors are initially attracted to the apparent simplicity and cost-efficiency of gold mutual funds, largely because they showcase a relatively low expense ratio. However, beneath the surface, a hidden cost often goes unrecognized—the dual expense ratio.
Rajani Tandale, Senior Vice President of Mutual Funds at 1 Finance, said, “Gold mutual funds typically invest in gold exchange-traded funds (ETFs), which, in turn, invest in physical gold. While the expense ratio of the mutual fund may appear modest, it only reflects the cost of managing the mutual fund itself. The underlying gold ETFs, however, come with their own set of expenses. As a result, investors inadvertently bear both the mutual fund’s management fee and the ETF’s expense ratio.”
“For instance, consider the SBI Gold Fund, which has an expense ratio of approximately 0.10%. However, since the fund allocates capital to the SETFGOLD ETF, which imposes an additional 0.73% fee, the total cost for the investor escalates to 1%. Unfortunately, many platforms fail to provide clear disclosure of this dual cost structure, leaving investors unaware of the full financial implications of their investment choices,” he explained.
Moreover, gold mutual funds come with additional charges such as exit loads, fund management fees, and custodian charges. Tracking errors can also impact returns. Investors should always review scheme documents carefully to avoid unexpected costs affecting profitability.
Furthermore, when investors opt for the regular option of a gold mutual fund—typically the commission-based variant—the expense ratio can increase significantly, potentially exceeding 1%, similar to the expense ratios of actively managed equity funds. The additional commissions paid to distributors only compound the impact on long-term returns, making direct investment options more appealing for those focused on minimising costs.