Is investment in gold mutual funds a better option?

India is termed as one of the biggest importers of gold. In India, people treat gold as auspicious and they also feel that it is one of the safest investments. This feeling is due to the fact that they are acquiring a physical asset. But if we look at gold as an investment option, it has performed poorly as an asset class when compared to equities. But gold is an asset that provides you hedge against financial market uncertainties. So it is wise to have gold in your portfolio.

Gold mutual funds do the same thing as you would expect i.e. buying gold. But unlike buying physical gold you have an option to invest a specific amount every month via SIP (Systematic Investment Plan) and buy gold. The advantages of buying a gold mutual fund are that it doesn’t come in physical form. So you need not worry about storing it, maintaining a bank locker to keep it safe and add to your costs nor you have to be worried about being robbed.

It is very important to understand that you must have a diversified portfolio in terms of asset class and not in terms of the number of mutual funds. So it is prudent to have a properly diversified portfolio in place which also includes gold as an asset class. Here, gold means investment, so jewellery is not to be considered as an investment. Investment in gold must be minimum 5 per cent and maximum 10 per cent of your overall portfolio. This is because gold is only to be held as a hedging tool.

Gold mutual funds are taxed the same as that of debt mutual funds. Realization of gains before 3 years are treated as STCG (Short Term Capital Gains) and the gains are added to your income and taxed as per income tax slab rate and any realization of gains post 3 years of investment is treated as LTCG (Long Term Capital Gains) and is taxed at 20 per cent with indexation benefit.