A portfolio of shares that are gathered from several investors is what is referred to as a mutual fund. A mutual fund or ETF (Exchange-Traded Fund) called a “Gold Fund” invests primarily in gold bullion or firms that produce gold. Read more about gold mutual funds, features, advantages, disadvantages, and more.
Gold Mutual Funds: Introduction
Gold mutual funds are a certain kind of mutual fund also known as ETF (Exchange-Traded Fund) which allows predominantly investment in gold producing firms. The basic goal of gold funds is to generate wealth by utilizing gold’s commodity potential. It is suitable for individuals who want to learn more about gold. It is more convenient to invest in gold through gold ETFs than it is to hold the metal wisely. Real gold assets combined with professional fund management may provide a comparable return.
Each gold mutual fund would have a fund manager who would make investment decisions based on the fund’s objectives. The returns of a gold mutual fund and a gold ETF may be comparable. Furthermore, the fund’s Net Asset Value (NAV) is influenced by the gold price movement in the overall market.
Features of Gold Funds
On many accounts, these gold mutual funds are a clever and less time-consuming option to invest in gold. Here are the key characteristics.
Over the investment period, the fund strives to expand your invested capital by utilizing the growing potential of gold as a commodity.
Changes in gold prices may cause the fund’s Net Asset Value to vary. This occurs because of daily fluctuations in gold demand and supply, which affect the market price of the metal. As a result, these funds are considered high-risk investments.
The rate of return generated by a gold fund is seasonal and can vary substantially depending on external factors. Gold mutual funds, unlike equities, may not be able to provide you with outstanding returns. During a market downturn, however, some funds may even outperform equities. Overall, you may be able to generate greater returns that outperform inflation.
Due to a variety of obstacles, including a lack of funds, investors may find it difficult to invest in physical gold. Gold Mutual Funds, on the other hand, make it simple to hold gold by allowing investors to make small, recurring gold investments.
The taxation of gold mutual funds is analogous to the taxation of debt funds. If you invest in a fund for fewer than 36 months (or three years), your gains are taxed according to your income tax bracket. Long-term capital gains from the fund, on the other hand, enjoy indexation benefits and are taxed at a rate of 20%. (Including relevant cess).
Advantages of Investing in Gold Mutual Fund
Gold mutual funds can be used to protect against economic downturns and stock market corrections. The price of gold is usually inversely connected with the stock market. As global stock markets correct, gold serves as a ” haven.” When the overall risk-taking appetite in equity shrinks, international gold prices tend to fly higher and register huge gains. When there are fears about global growth, political instability, and other factors, this occurs. However, as history has shown, these periods do not continue, and gold eventually loses its gains. In risk-on settings, gold prices stay within a narrow range or decline as investors ditch gold in favor of riskier equities and debt investments in search of bigger returns.
Furthermore, because gold money will be invested in the form of digital units, the investor will not have to worry about the gold’s safekeeping or storage. To invest in gold funds, one does not need to have a Demat account.
How to Invest in Gold Funds?
Gold mutual funds, like equities shares, may be purchased on the stock exchange. Units of gold funds, like other mutual funds, can be purchased through the appropriate fund house without the requirement for a Demat account.
- Only the purest products (99.5 percent purity) are chosen and invested in.
- The whole fluctuation of gold market prices is reflected in this indicator. Gold funds have very low fund management fees of less than 1.5 percent.
- Investments and redemptions can be made at any time, and proceeds are received in bank accounts within three days.
- The price is low. The fund’s expenditure ratio, which is capped by SEBI, is the only cost.
- It’s easy and quick. Online platforms, distributors, Demat accounts, and the AMC itself are all options for investing.
Risk of Investing in Gold Mutual Fund?
Gold is denominated in US dollars, therefore its prices are affected by changes in the dollar. When the dollar rises against other currencies, for example, the price of gold tends to fall in US dollar terms. At the same time, other currencies, such as the rupee, become more expensive in other currencies.
When investing in gold mutual funds, it’s important to check the issuer’s legitimacy and creditworthiness. If the issuer of a gold instrument does not invest in gold, the holder of the instrument may lose all of his or her money.
Reasons to Invest in Gold Funds
In the current environment, growing inflation and the Russia-Ukraine conflict have resulted in a global increase in gold prices, making gold an attractive investment alternative. Gold mutual funds, which invest in gold bullion, are a great inflation hedge and a smart investment when the stock market is falling.
Gold Mutual Funds are less expensive than real gold investments, and they allow investors to buy as little as one unit of gold. Furthermore, because the transaction would be conducted electronically, the investor will not be concerned about the storage or security of the gold.
Tax Benefits on Gold Funds
Gold mutual funds in India (as well as real gold) are taxed based on capital gains and holding terms. If you have held the fund for at least three years, you must pay tax on the capital gain at a rate of 20%, with indexation benefits. Capital gains will be taxed at your income tax bracket rate if the holding period is less than this.
In a nutshell, gold mutual funds – often known as financial gold – are a more efficient, cost-effective, and superior way to invest in gold.
Best Performing Gold Funds in 2022
Some of the best gold mutual funds to invest in are as follows:
- Axis Gold Fund
- IDBI Gold Fund
- HDFC Gold Fund
- Canara Robeco Gold Savings Fund
- Aditya Birla Sun Life Gold Fund
- ICICI Pru Regular Gold Savings Fund
How do Gold Mutual Funds Make Returns?
Gold funds are open-ended funds that invest in Gold Exchange Traded Fund units (ETF). The basic goal of gold funds is to generate wealth by utilising the commodity potential of gold. It is appropriate for those who want to gain exposure to gold.
Investing in gold mutual funds is a smart strategy to get gold exposure. However, you should be aware that the value of a fund might change, and there are no guarantees on investment returns. Only invest in a fund if you are confident in its growth prospects.
SGBs are government securities denominated in gold grams. The gold bond is not designed to replace real gold. The issuing price must be paid in cash, and the bonds have to be redeemed in cash when they reach maturity. The Reserve Bank of India issues bonds on behalf of the Indian government.
Because the investor receives the current market price at the time of redemption/premature redemption, the amount of gold for which he pays is protected. The SGB is a superior alternative to physically keeping gold. Storage hazards and expenses are no longer an issue.
The market value of gold upon maturity, as well as periodic interest, are guaranteed to investors. In the case of gold in jewelry form, SGB is free of difficulties such as making charges and purity. The bonds are held in the RBI’s records or in Demat form, which eliminates the danger of scrip loss.
There’s a danger you’ll lose money if the price of gold decreases. However, in case of a dip in gold price investors do not lose any of their money on their purchased gold units.
The SGB is available to everyone who is an Indian resident as defined by the Foreign Exchange Management Act of 1999. Individuals, HUFs, trusts, universities, and charitable organizations are all entitled to participate as investors. Individual investors who switch from resident to non-resident status can keep their SGBs until they are redeemed or mature early.
Because gold mutual funds invest in gold bullion, they are a strong inflation hedge and perform well when the stock market falls. Gold Mutual Funds are less costly than real gold investments and allow investors to buy as little as one unit of gold.
Gold transferred over generations or given as a gift is tax-free. However, other gold investments are taxed as per capital gains.
Gold funds are often considered one of the best ways to invest in gold, considering the multiple benefits it offers.
Read more about Tax on Mutual Funds.