Everything About Gold Funds: Benefits, Risks Involved and More
Index ETFs/Exchange Traded Funds: Meaning And Benefits
28 February 2022
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28 February 2022Among all the precious metals available in the market, gold is one of the most expensive and versatile commodities. The thought of purchasing gold and storing it safely can be daunting. Fortunately, Indians can now conveniently invest in gold funds without having to buy them in their physical form.
Keep reading to learn more about this new way of investing in gold!
Table of contents
What Are Gold Funds?
Upon realising the increasing worth and potential of this precious metal, investors wanted to own gold without holding on to its physical form. Furthermore, investors realised that gold mutual funds could help them protect their portfolios against inflation or economic shocks. This led to the growing popularity of gold funds.
These are a type of open-ended mutual fund that invests in various forms of gold. A gold fund pools in your money along with that of other investors and buys gold. In simpler terms, gold mutual funds collect cash and invest it in gold ETFs.
The Net Asset Value (NAV) of the fund varies according to the price of this metal, as the element in which you are investing is physical gold. Furthermore, the returns of the fund are closely dependent on that of gold ETFs.
Given the recent economic instability, the price of gold is rising, and so is the popularity of this fund. Many investors are trying to invest a portion of the funds available with them in gold funds to increase their passive income and shield their investment from market fluctuations.
Difference between Gold Funds and Gold ETFs
When it comes to investing in gold, investors must know the following differences between gold funds and gold ETFs.
- Mode of investment
To invest in any type of mutual fund, you go to a fund house directly or route the transaction via a broker. Whereas gold ETFs are like stocks that you purchase on the stock exchange, using a Demat account.
- Pricing
You will be able to purchase units of gold funds based on their Net Asset Value, which is revealed after trading hours. However, you can see the real-time value of ETFs while purchasing them as they are listed on stock exchanges.
- Minimum investment required
Mutual fund houses may set different limitations to the minimum investment required. Generally, gold funds require a lump sum one-time payment of Rs. 5,000 and an additional amount of Rs. 1,000, if the investor wants. In terms of gold ETFs, one unit of ETF is equivalent to 1 gram of gold.
- Liquidity
As gold ETFs work like stocks, they offer higher liquidity. They do not have an exit load, and you can buy or sell any unit during market hours. However, mutual funds do not operate on a stock exchange. Thus, you will have to approach your agent and redeem your investment with interest based on the prevailing NAV.
Also Read: Equity Mutual Funds
Benefits of Investing in Gold Funds
To make an informed decision before investing in gold funds, take a look at the advantages that these schemes offer:
- Easy gold investment
With mutual funds, you get the advantage of investing in an asset like gold efficiently. Without actually possessing tangible gold, you can reap all its benefits. Moreover, you do not have to open a Demat or trading account to invest.
- Low-risk
As gold funds are regulated by the Securities and Exchange Board of India, the risk involved is minimal. SEBI keeps a check on the market changes for this fund and reports on their future pricing. Generally, gold rates are not subject to much volatility. Furthermore, these funds provide a hedge against geopolitical disturbances and inflation.
- Diversified portfolio
Gold funds and equity instruments have an inverse relation. When the latter is suffering due to market downturns, the former tends to do better. Thus, to reduce market risk, investors include gold funds in their investment portfolios.
- Higher liquidity
Gold funds might not have the same liquidity as ETFs, but they are still highly liquid investments. Compared to tangible gold, selling the units of the fund is hassle-free. Moreover, fund houses do not keep a lower limit to the redeemable amount. Thus, to fulfil any of your financial requirements, you can redeem your investment at your convenience.
Risks Involved with Investing in Gold Funds
Indeed, gold funds are one of the safest options and among the low-risk investment opportunities. Yet, they do carry certain risks. They not only offer lesser returns than equities but tend to only perform during disruptions in the market. Thus, in times of overall financial stability, returns from gold funds can diminish drastically.
Furthermore, these funds are suitable to diversify only large-sized portfolios as their allocation will not massively impact the total returns. For a small or mid-sized portfolio, gold funds can harm the overall returns.
Taxation of Gold Funds
The taxation of gold funds is similar to that of physical gold. However, taxation also depends on the holding period. So, if you invest in this type of fund and redeem it within three years, the returns qualify as short term capital gains. In this case, the returns will be added to your gross income and taxed according to your income slab.
Whereas if the holding tenure is longer than three years, the returns fall in the long term capital gains category. So, you will have to pay a 20% tax along with indexation benefits.
Also Read: Sectoral Mutual Funds
Who Should Invest in Gold Funds?
So far, it is clear that gold funds provide investors with an opportunity to earn reasonable passive income. These are especially for investors who are interested in gold bullions and wish to buy them without facing the issue of storage and safety.
Moreover, gold funds are low-risk investment options that are best suited for those looking to diversify their portfolio. They are famous because of their ability to shield your investments against inflation and political disruptions. They do not fluctuate like the other mutual funds and thus, satisfy the needs of risk-averse investors.
Final Word
Investors enter the mutual fund market to ensure that they receive high returns, which is possible through equity instruments. However, investing 100% of your assets in equities is also not a wise decision. Fortunately, gold funds hedge your portfolio against financial and political disruptions. Moreover, they allow you to reap the benefits of owning physical gold and its increasing market value and prices.
Frequently Asked Questions
Ans: Gold funds have seasonal behaviour. They perform comparatively better when the market is suffering from financial or geopolitical troubles. However, if the market is stable, gold funds can offer negative returns in the short term.
Ans: Gold funds invest in various reserves of gold. Your fund manager can invest in either physical metal (bars or coins) or stocks of mining, producing, or distributing agencies. The manager can also allocate money to a combination of these reserves.
Ans: In the long term, the entry and exit points of a gold fund will not have a massive impact on the returns. However, as these funds do tend to perform better during economic downturns, investing during that period can benefit you more.
Ans: If you are looking to invest for a longer duration of 8 years or more, gold bonds might suit your financial requirements better. They offer a guaranteed annual interest and a zero default rate. That said, if you want more liquidity and faster returns, a gold fund is a better option.
Ans: Yes, gold funds are open-ended mutual fund schemes. Thus, you can redeem your investment with interest through offline or online methods on any business day. Your returns will be according to the NAV of your fund on that particular day.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully before investing.
