Gold funds that invest in Gold Exchange Traded Funds are considered as Gold Mutual Funds. Gold funds rely on the instruments that are directly linked to the prices of gold and invest in gold bullion. By using the potential of gold as a commodity, managers aim to create wealth by way of gold mutual funds. Gold mutual funds are an excellent investment alternative for investors looking for diversification. These funds are a more comfortable option to invest in gold rather than holding it as a physical asset.
These funds offer the combined benefits of investing in physical gold and professional fund management. Returns from Gold Exchange Traded Funds and gold mutual funds might be similar to each other. The gold price fluctuations in the market have an impact on the NAV of the fund.
It is beneficial to invest in gold funds during uncertainty in the equity markets. Gold funds are the best investments during a market downturn. These funds act as an insurance cover for an investor’s portfolio. Gold funds are an ideal investment option for investors who aim to protect their capital against inflation.
Things to Consider Before Investing in Gold Mutual Funds
Investing in gold mutual funds is the same as any other mutual fund. Investment in gold mutual funds can be done through a mutual fund provider.
Following are the things to be considered as an investor before investing in gold mutual funds:
Lower Returns: Unlike equities, gold investments may not earn exceptionally high returns. Usually, investments in gold mutual funds are made during market uncertainties, and once the market settles, investments are moved to riskier options. This short term haul might not earn high returns.
Seasonal Behaviour: Gold’s performance portrays seasonal patterns. During a market crisis, it earns high returns; otherwise, it is lagging behind other asset classes. One can always understand the seasonal patterns by tracking the historical performance of gold.
Diversification: For investors with small to medium-sized portfolios, gold isn’t the ideal asset class for diversification as gold earns low returns compared to other asset classes. While for investors with a large portfolio, can allocate a small amount to gold funds to hedge risk, without compromising on their goals.
Dynamic Portfolio Allocation: Tactful allocation of gold to the portfolio is very important. In other words, increasing investment in a gold fund during a market depression is essential to earn high returns. Similarly, as the market recovers, shifting these investments to other asset classes that have better potential to earn higher returns is wise. Therefore, a dynamics allocation approach will help reap the maximum benefits of investing in gold.
Track the trend: It is impossible to time the market while investing. However, tracking the historical performance of the price fluctuations will give a rough idea to decide on an entry point for your investment. How accurate can this be? Therefore, investing a small amount at regular intervals through SIPs can also be done with gold mutual funds.
What are the benefits of investing in Gold Funds?
Good Return On Investment: Gold’s worth rarely depreciates. Gold mutual funds offer positive returns as their value is directly linked to the market value of gold.
Hedge against Inflation: During inflation, gold prices are unaffected, making them a perfect investment option to hedge portfolios.
Safe Investment: Gold is considered as a safe investment option due to its ability to appreciate and resist unstable market situations.
Diversification: Gold mutual funds are a perfect diversification option for investors looking at low-risk investment options.
No Demat Account: Gold mutual funds allow an investor to invest in gold with a nominal investment amount. For this, a Demat account isn’t compulsory, and investment can be made through a mutual fund provider.
Systematic Investment Plan (SIP): Investors need not worry about the high value of physical gold and stay away from investing in it. With gold mutual funds, they can always invest small amounts regularly in a disciplined manner and do not worry about timing the market. One can always estimate their potential SIP return from a gold fund using Scripbox’s SIP calculator.
Liquidity: Unlike physical gold, gold funds can be redeemed easily on all business days.
Cost-Effective: Gold funds have a low investment amount. With SIPs, it’s easy for small investors to invest in gold. Additionally, there are no extra expenses like annual maintenance charges of a Demat account, brokerage fees, transaction fees, or delivery fees associated with these investments, making them cost-effective. Hence these funds have a low expense ratio. Moreover, the SIP return is boosted through lower expense.
What are the risks of investing in Gold Funds?
Fluctuation in Gold Prices: Market demand and supply affect gold prices. The prices are very seasonal in nature. Gold performs well only when the stock market isn’t. That was the reason behind good returns from the gold investment during the 2008 market crash. Due to high volatility, gold cannot be an investment option but can work as an insurance cover.
Gold may not give exceptional returns: Gold, unlike equities, doesn’t provide good returns. Hence one cannot consider it as a long-term investment option. It only works well during a market crisis as an alternative option. But investing in gold as an asset class to earn returns is not a very fruitful option.
Expenses: Gold funds invest in gold ETFs. The cost of ETFs is added to gold mutual funds and hence are costlier than gold ETFs. Gold funds also charge an exit load if the investment is redeemed before a predetermined lock-in period. However, there are no extra expenses like annual maintenance charges of a Demat account, brokerage fees, transaction fees, or delivery fees associated with these investments, making them cost-effective. Hence these funds have a low expense ratio.
Taxation: Gains on gold funds are taxable on the basis of the holding period of the investment. Investments with holding period less than 36 months, are taxable at the investor’s income tax slab rate. For more than 36 months, then they are taxable at 20.8% (including cess) with indexation benefits.
Gold Mutual Funds in India
Gold mutual funds gave exceptional returns last year. They were topping the charts at 23% returns. Falling economic growth, falling interest rates, US-China trade war, Brexit Issue, tensions in the Middle East have fuelled the rally of gold prices. If the situations further worsen, the gold prices might shoot up. A conservative investor saving up for gold for future use can invest in gold funds through SIP. Experts often recommend investing a maximum of 10-15% of the assets in gold. This will provide the needed diversification in the portfolio. Anything further than 15% might hinder the returns of the portfolio during bullish market conditions.