Understanding Gold Funds & its Benefits
By Akhil Chugh
Date January 9, 2022
Indians are very culturally inclined towards buying gold, whether for ornamental purposes or even for wealth creation. Also, India being the country of various festivals all year round, investors always look at buying gold. Gold is an important asset class in most portfolios given its ability to grow with inflation and protect the portfolio from volatility caused due to financial and economic crisis.
Today, gold as an investment is available in many forms such as physical gold, E-Gold, etc. Gold Funds have emerged as one of the most popular routes for gold investments. In this blog, let’s learn more about Gold Funds & their benefits.
What are Gold Funds?
Gold funds are one of the smartest ways to invest in gold as an asset class without having to hold it in the physical form. A gold mutual fund invests the collected corpus in gold exchange traded funds (ETFs). Its aim is to copy the movement of domestic gold prices.
Gold mutual fund provides the dual benefit of professional portfolio management and convenience.
Who can invest in Gold Funds?
Investing in gold funds is as easy as investing in mutual funds. Gold funds are ideal for investors looking for portfolio diversification and lowering the risk of investment. It is regulated by market regulator Securities and Exchange Board of India (SEBI), which lowers the risk associated with investing in a mutual fund. Gold funds are insulated from financial market fluctuations, thus are relatively stable and attractive to conservative investors.
Benefits of investing in Gold Funds:
1. No storage cost:
One of the most important aspects of gold funds is that it is an electronic investment so there are no storage charges involved as is the case with physical gold.
2. Disciplined investment:
Gold Funds offer a good opportunity to invest in gold for the long term through monthly SIPs thus providing the benefit of rupee cost averaging to investors.
3. No Demat account necessary:
Since Gold Funds are mutual funds, you can easily invest in them without ever having to open a Demat account to do so. This makes them convenient and accessible to more people.
4. Portfolio diversification:
“Don’t put all the eggs in one basket” is a common thumb rule of investing. Gold mutual funds are an excellent investment option to diversify one’s investment portfolio and reduce overall market risk. Gold and equity markets have a negative correlation. So, if the markets are falling, gold prices will increase. This makes gold mutual funds perfect for protection against any market downturns.
5. Hedges inflation:
Inflation is when the price of goods and services increases over a period of time. Gold is considered to be inflation-proof.
This means that the growth in gold will always be more than the inflation rate. Thus, investing in gold mutual funds can be considered a safe haven asset delivering inflation-beating returns.
6. Easier to sell:
This is a huge advantage of investing in gold mutual funds over physical gold. When you sell physical gold, the jeweller will charge 1%-2% making charges.
There are other wastages that reduce the overall price of your jewellery. All this reduces your selling price by 2%-2.5%.
So, basically, you pay more while buying and earn less while selling. Let us understand this with an example.
Suppose you bought a jewellery on 1st January 2022. The total weight was 10 grams. You paid Rs 50,577 for the ring including making charges. After a year, if you had to sell your ring for some emergency and the price of gold is Rs 51,000 per 10 grams.
You think you made a profit of Rs 423. But wait, the jeweller pays you only Rs 48,450. Notice that the price of gold has gone up. But you still made a loss of Rs 2,127. This is because the jeweller will remove making charges and wastages from the sales price.
This does not happen in the case of gold mutual funds. Here you do not have to pay making charges as you are holding electronic gold. On maturity, you can redeem for the existing price of gold without any deduction.
If you had invested the same Rs 50,577 in a gold mutual fund, you would have received Rs 51,000 on maturity.
7. High liquidity:
Selling physical gold is time-consuming and it is almost always sold at a discount to its market rate. Some jewellers may not accept gold bought from other shops. This will lead to further price reduction.
There is no such hassle in gold mutual fund. Here, you simply have to submit the redemption form to the fund house and you will receive the equivalent value without any discounts.
8. Well-regulated:
The physical gold market is an informal market. Here, the jeweller’s word is final. They decide the price at which they will buy or sell gold. At times, there is a gross misuse of this power.
However, gold mutual funds are regulated by the Securities and Exchange Board of India (SEBI). All fund houses work under strict SEBI rules.
This ensures your investment in Gold Funds is in safe hands.
How Gold Funds are taxed?
Taxation of gold mutual funds in India is similar to taxes implied on gold jewellery. Taxes are also levied depending on the investment duration; if the date of investment and date of redemption is less than three years, it is considered a short-term investment. In this case, the revenue is added to the investor’s gross income to calculate tax.
If the duration is longer than three years, its returns are considered as a long-term investment and are taxed at 20% along with indexation norms.
Key Takeaways from Net Brokers:
- The primary aim of putting money into gold funds is to generate wealth during the investment tenure and create a cushion against market fluctuation.
- We suggest investors invest around 10-15% of their portfolio in gold funds via SIP route to benefit from rupee cost averaging in the long run.
- Gold Funds are superior to physical gold in terms of storage benefits, ease of use and liquidity.
- Gold Funds offer a good opportunity to invest in the gold industry for the long-term through SIP.
The next time you are looking for a profitable yet dependable investment option, consider Gold Funds.
For more information, get in touch with us today.
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Happy investing.