Everything About Gold Funds: Benefits, Risks Involved and More

Mutual funds

Among 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!

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

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.