Personal Finance

All You Need To Know About Gold Mutual Funds

May 7, 2020

All You Need To Know About Gold Mutual Funds

We all have invested in gold in one form or another. This is true because it offers us adoration value and provides support during monetary emergencies. With time, there has been a significant evolution in the ways in which we can own gold; gold mutual fund being one of them.

What Are Gold Mutual Funds?

Gold Mutual Funds are open-ended schemes that invest in Gold Exchange Traded Funds (ETFs). The Gold ETFs are avenues that track prices of gold and are listed on prominent stock exchanges like equity shares. When you invest in a gold mutual fund, the fund house utilises your money to buy units of Gold ETF and then allocates to you units in the proportion of your investment in the fund. Thus, your investment in gold mutual fund grows as and when the prices of the gold rise in the market.

Features Of Gold Mutual Funds

These funds offer a smart and less cumbersome way to invest in gold on many accounts. Let’s have a look at its important features.

Investment objective

The fund aims to grow your invested capital with the help of the growth potential of gold as a commodity over the given investment duration.

Risk involved

The Net Asset Value of the fund might fluctuate due to changes in the gold prices. This happens on account of the day-to-day variations in the demand and supply of gold that in turn affect its market price. These funds are, thus, regarded to be moderately high-risk investments.

Return potential

The level of return that a gold fund generates is seasonal in nature and may vary greatly depending on the external circumstances. Unlike stocks, gold mutual funds may not be able to give you exceptionally high returns. However, during a market slump, these funds may even outperform stocks. On the whole, you may earn superior returns that can counter inflation.

Suitability

Often, investors may find it difficult to invest in physical gold due to a number of constraints, the paucity of money being one of them. Gold Mutual Funds, on the other hand, makes it easy to own gold with the help of smaller and regular investments in gold.

Taxability of gains

The manner in which gold mutual funds are taxed is similar to that of debt funds. If you stay invested in the fund for less than 36 months (or 3 years), then your gains from the fund are taxed as per your income tax slab. The long term capital gains from the fund, on the other hand, attract the benefit of indexation and are taxed at the rate of 20% (including relevant cess).

Benefits Of Investing In Gold Mutual Funds

There are a number of benefits that gold mutual funds offer over physical gold. Some of them are listed below.

Easier to manage than physical gold

With physical gold, you may face issues like fear of theft and storage charges among others. As opposed to this, in the case of gold mutual funds, you get to enjoy the advantage of owning pure gold with the convenience of it being an electronic investment.

Safe haven during uncertainties

Unlike stocks and bonds, gold is considered to be a safer haven that you may count on when the markets go down. Thus, gold mutual funds might be your go-to option to earn a positive return on investment as gold prices tend to appreciate during tough times.

A great option to diversify the portfolio

One of the best ways to diversify your investment portfolio might be to allocate some part of it in gold mutual funds. If you have a large portfolio of which equity forms a core part, these funds may provide you much-needed stability without letting your wealth creation goals affected.

Highly tax-efficient alternative

If you want to invest in gold and also wish to save on taxes, then the gold mutual fund can help you to do so. The long term capital gains from the funds get the indexation benefit. In this, your initial investment gets adjusted to incorporate the effects of inflation so as to lower your tax liability. Along with this, the resultant gains are taxed at lower rates as an added advantage.

Requires nominal amount to invest

Many times, you may find it difficult to buy a smaller amount of gold that is less than a gram. These funds offer you an option to structure your overall investment in gold. At Paytm Money, you can invest in your preferred gold mutual fund via SIP of as low as Rs 100.

Conclusion

Investing in gold mutual funds is an intelligent way to take exposure in gold. But at the same time, you need to understand that fund value may fluctuate and there are no guaranteed returns on investment. Choose a fund only after you are convinced about its growth potential.