All You Need to Know About Gold Mutual Funds

Apr 20, 2023 / Reading Time: Approx. 10 mins

Listen to All You Need to Know About Gold Mutual Funds

00:00 00:00

 

You all may have some investment in gold in form of jewellery. After all, gold is considered one of the most valuable precious metals in the world, and it continues to be a popular investment for ages.

Gold's eternal value has appealed to many individuals since time immemorial. It is regarded as a safe haven, a counter against inflation, and when other asset classes and the economy takes a downturn proved to be a portfolio diversifier.

With time, there has been a significant evolution in ways one can own gold: one of them being Gold Mutual Funds.

What are Gold Mutual Funds?

Gold mutual Funds come typically in two forms: 1) a Gold Exchange Traded Fund, and 2) Gold Savings Fund. Like any other mutual fund scheme, they are professionally managed by a fund manager and his team at the fund house.

Let us understand Gold Exchange Traded Fund and Gold Savings Fund in more detail...

1. Gold Exchange-traded funds (Gold ETFs) - Gold ETFs aim to track the domestic price of physical gold; they are passively managed and make direct investments in Gold. To gain exposure to gold without having the hassle of physically holding it, a gold ETF is a worthwhile option.

The investment objective of a gold ETF is to generate returns broadly in line with the domestic price of gold. If gold appreciates, you benefit.

To invest in Gold ETFs, you need a Demat Account and Trading Account, and the purchase order can be placed through your broker - just like the way you buy shares on the recognised stock exchange. When you buy a gold ETF unit/s, these will be reflected in your demat account (on a T+2 basis). Note that investments in Gold ETFs cannot be made through the Systematic Investment Plan (SIP) route.

[Read: 5 Best Equity Mutual Funds for SIP in 2023]

The units purchased will be backed by 0.995 finesse of physical gold by the respective fund house. The physical gold is held in vaults by an appointed custodian for the ETF on your, the investors' behalf, plus insured and valued periodically, as per the guidelines stipulated by the Securities and Exchange Board of India (SEBI).

To sell the gold ETF units, you need to place the order with the broker who will then execute it on the stock exchange, and if the trade is executed successfully, the proceeds from it shall be received on a T+2 basis into your bank account, and the gold ETF units move out from your demat account.

Say you wish to convert your gold ETF units into physical gold at a future date, that is possible only for a certain quantity (usually 1 kg.) The fund house will carry out KYC (Know Your Customer) checks to validate that the delivery reaches the same person as the actual investor.

Subsequently, the fund house will issue a 'delivery order' to the custodian and investor. And while taking the delivery of your physical gold, you are required to produce the KYC documents plus the delivery order. This entire process generally takes around 2 to 3 working days. But to take physical delivery of gold after conversion, keep in mind you are required to pay in cash for the accrued expenses, transportation cost, and GST (Goods and Services Tax) levied by the fund house.

2. Gold Savings Fund -- It is a Fund of Fund scheme investing in underlying Gold ETFs, which benchmarks the performance against the prices of physical gold. It strives to produce parallel returns that closely resemble the underlying Gold ETF. Hence, the investment objective of a Gold Savings Fund is to generate returns that closely correspond to returns generated by the underlying Gold ETF.

To invest in a Gold Savings Fund, you are not required to have a Demat account. To buy units in a Gold Savings Fund, approach the fund house or your mutual fund distributor.

The units of a gold savings fund will be purchased at the NAV declared by the fund house, and the allotted units will reflect in your mutual fund account statement. Gold Savings Fund allows you to invest disciplined manner through the SIP route with a sum of as little as Rs 500.

Similarly, when you wish to sell your units in a Gold Savings Fund, you need to fill in and sign the redemption request slip, submit it to the Registrar and Transfer Agent (RTA) of the fund, or directly to one of the customer service offices of the fund, and within around 3 to 4 working days, the redemption proceeds would be credited to your bank account, and this shall also be reflected in your mutual fund account statement. It is as simple as that.

Whether you choose a Gold ETF or Gold Savings Fund, clearly there are benefits over holding physical gold, such that you do not have to worry about storage or holding costs, risk of loss, theft, and there is enough better flexibility and liquidity. It is a hassle-free and smart way to invest in gold.

 

What about the taxation of Gold Mutual Funds?

After the passage of the Finance Bill 2023, the taxation of Gold Mutual Funds has changed. As per the new tax rule, the indexation benefit that helped reduce the tax impact (by taking into account the cost of the inflation index) in the case of Long Term Capital Gains of these schemes, is now no longer available. The returns earned on Gold Mutual Funds are now taxed at the marginal rate of taxation, i.e. as per your income-tax slab.

That said, just because the tax rule has changed does not mean you should avoid Gold Mutual Funds. At present, there are enough convincing reasons to invest in Gold Mutual Funds.

[Read: Why It Still Makes Sense to Invest in Gold Mutual Funds Despite the Change in Tax Rule]

All You Need to Know About Gold Mutual Funds
(Image source: freepik.com; Image by @wirestock on Freepik)
 

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

 

What to look at when investing in Gold Mutual Funds?

Although gold mutual funds are paper units, they invest in actual gold and thus when the price of physical gold rises it influences the performance of gold mutual funds. A Gold ETF's performance can be evaluated in comparison to the benchmark index it replicates. A lower tracking error indicates that the scheme's returns are closely in line with the performance of underlying gold.

Graph: Gold has displayed its sheen in the long run

MCX spot gold price, data as of April 18, 2023
(Source: MCX, PersonalFN Research)
 

Gold is prone to having seasonal responses as far as performance is concerned. But over the long term, gold has exhibited its sheen.

Typically, gold mutual funds deliver higher returns during periods of macroeconomic and geopolitical uncertainty, period of high inflation, stagflation, economic slowdown or recession, geopolitical tensions, and intense stock market volatility. In times when equities plunge, debt does not yield attractive real returns, it is gold that usually displays its trait of being an effective portfolio diversifier.

Should you consider investing in Gold mutual funds?

At present there are convincing reasons to invest in gold, mainly:

  • Elevated retail inflation

  • Global economic uncertainty -- as economic consensus projects weaker global growth

  • Simmering geopolitical tensions

  • Stock market volatility

On account of the aforesaid among other factors, many central banks, too, are adding gold to their reserves as a risk mitigation measure.

For you, as an investor also it sense to strategically have around 10%-15% of your entire investment portfolio to gold and hold it with a long-term view (of over 5 to 10 years) by assuming moderately high risk. You may consider some of the best performing Gold ETFs and Gold Saving Funds for this purpose, instead of buying physical gold. Gold Mutual Funds would offer stability to your investment portfolio and be more liquid than physical gold.

You see, in times of need, gold is looked up to as a lender of last resort commanding a store of value. A fact is unlike financial assets, gold is a real asset --meaning gold does not carry credit or counterparty risk; it is considered to be a reserve currency.

FREQUENTLY ASKED QUESTIONS (FAQs)

How to invest in gold smartly?

Gold mutual funds viz. Gold ETFs and Gold Saving Funds are the smart ways to invest in gold. Compared to holding gold in physical form (bars, coins, jewellery, etc.) -- where you worry about storage, security, holding cost, and resale value -- Gold ETFs and Gold Saving Funds are convenient, cost-effective, transparent, liquid, flexible, and a hassle-free way to own gold in your portfolio.

What are Gold ETFs?

These are passively managed exchange-traded funds that make direct investments in gold. The investment objective of a gold ETF is to generate returns broadly in line with the domestic price of gold. If gold appreciates, you benefit.

How to invest in Gold ETFs?

To invest in Gold ETFs you need a Demat Account and Trading Account, and the purchase order can be placed through your broker (just as the way you buy shares).

To sell the gold ETF units also you need to place the order with the broker.

Can you do SIPs in Gold ETFs?

No, investments in Gold ETFs cannot be made through the Systematic Investment Plan (SIP) route.

What is a Gold Savings Fund?

It is a Fund of Fund scheme investing in underlying Gold ETFs, which benchmarks the performance against the prices of physical gold. It strives to produce parallel returns that closely resemble the underlying Gold ETF.

Can you do SIPs in a Gold Savings Fund?

Yes, a Gold Savings Fund allows you to invest disciplined manner through the SIP route with a sum of as little as Rs 500.

How much of your entire investment portfolio should you allocate to gold?

Consider allocating 10%-15% of your entire investment to gold and hold it with a long-term view (of over 5 to 10 years) by assuming moderately high risk. Gold would serve as an effective diversifier in your portfolio.

Happy Investing!

 

ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.

As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.

He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.

He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.




Add Comments