Gold funds: Easy investment in gold
Traditionally in India, people buy gold not as an asset, but for consumption. Most Indian families possess some or the other type of gold assets such as gold jewellery, biscuits, coins, etc. Nevertheless, physical gold has many drawbacks like storing gold safely in a safety vault or bank lockers, which adds extra cost, no flexibility in investment amount, purity issues, etc. Investors can avoid these drawbacks by investing in gold funds.
Gold mutual funds are open-ended funds. The value of the fund is directly dependent on the price of gold. Even a slight change in gold’s global market price can cause changes in the prices of gold and the funds investing in gold. Gold mutual funds invest in Gold ETFs, which in turn, invests in physical gold of higher purity.
Difference between Gold funds, Gold ETFs, and physical gold:
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Gold funds
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Gold ETFs
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Physical gold
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Pricing
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Gold funds NAV are disclosed at the end of the trading day like any other mutual fund.
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Gold ETFs are listed on stock exchange; pricing is on the basis of real market timings.
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Physical gold price is as per the prevailing market price of the gold.
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Investment mode
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You can invest via SIP, which is one of the advantages of the Gold fund.
For investing in a gold fund, you don’t need a Demat account. You can just buy units of the gold funds from the respective fund houses.
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Gold ETFs offer no SIP option to the investor. For investing in Gold ETFs, you need to have Demat account as these are listed on the stock exchange. You can buy Gold ETFs like any other share.
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There is no SIP option available here. For purchasing physical gold, you need to go to your jeweller.
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Expenses
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The expense ratio is higher as compared to Gold ETFs as these funds are managed by fund managers.
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Gold ETFs have lower expense ratio as expenditure involved in managing these ETFs is lower than Gold funds.
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After purchasing physical gold, the question is where to store it safely? So, for storing gold, we need to keep it in a safe vault or bank lockers, which adds up the further cost. (But this is a one-time cost)
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Minimum investment amount
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You can invest a minimum of Rs 500 through SIP.
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Having one unit of Gold ETF means owning 1 gram of gold. This is the minimum investment in Gold ETF.
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You can invest a minimum of 1 gram of gold coin.
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Transaction cost
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There can be an exit load if you redeem your units within a predefined lock-in period.
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There are no transaction costs while investing and redeeming the units.
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Jeweller would charge some premium over basic cost. Physical gold is a little expensive.
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What should investors know before investing in gold funds?
Returns: Returns are quite low as compared to equity. These funds offer higher returns when the market is facing drawdown whereas higher returns when the market is high.
Dynamic portfolio allocation: Ideally, investors should choose to invest in gold but you should just allocate a little part of your portfolio towards gold. Gold is considered a hedge against inflation. Investors should change asset allocation according to the behaviour of the market. When the market is facing depression, then investors should allocate a higher proportion towards gold, and when the market recovers, then investors should switch to other asset classes, which will reap better returns.
Safer than owning physical gold: It is safer than physical gold as by investing in these funds, you don’t have to worry about the storage. You can invest small amounts as low as Rs 500, which allows even those individuals to invest, who cannot afford to purchase physical gold.
Taxation: Any capital gains arising on these funds vary depending upon the term of the investment. If any capital gains arising are less than three years, then it will be short-term capital gain, which will be taxed as per Income Tax slabs. If capital gains arising are more than three years, then it will be long-term capital gain, which will be taxed at the rate of 20 per cent.
The following chart depicts the trend of gold prices from January 2020 to June 2021:
As you can see, the above trend shows that gold prices were rising when the market was falling due to pandemic from February 2020 and when the market started recovering, gold prices started falling. The best time to invest a higher proportion of gold is when the market is falling.