Gold Fund Investment: A Beginner's Guide To Getting Started

Gold has been a store of value for thousands of years, but the idea of gold as an investment generates controversy. Gold funds are one of the newest ways to invest in gold as an asset class without having to hold it in physical form. Gold funds are open-ended funds that invest in units of a Gold Exchange-Traded Fund (ETF). The primary aim of gold funds is to create wealth by making use of the potential of gold as a commodity. In this article, we will discuss how to invest in gold funds.

Gold Mutual Funds vs Gold ETFs

Gold mutual funds and gold exchange-traded funds (ETFs) are two different ways to invest in gold. Both options have their own advantages and disadvantages, and the right choice depends on your investment goals and preferences. Here is a detailed comparison between the two:

Investment Method

Gold mutual funds allow investors to start with a Systematic Investment Plan (SIP) for as low as Rs. 500, while gold ETFs require a minimum investment of one unit, equivalent to one gram of gold. This makes the entry barrier for gold mutual funds much lower.

Mode of Holding

Gold ETFs are traded on the stock exchange like equities, and you need a broker and a Demat account to buy and sell them. On the other hand, gold mutual funds can be purchased directly online or through an agent, and you don't need a Demat account.

Systematic Investment Plan (SIP)

Gold mutual funds offer the flexibility of investing through SIP or lumpsum, while gold ETFs do not have the SIP option.

Transaction Costs

Gold ETFs have annual charges ranging from 0.5% to 1%, which includes brokerage, expense ratio, and other fees. Gold mutual funds have slightly higher annual charges, ranging from 0.6% to 1.2%. However, gold ETFs do not have exit loads, while gold mutual funds may charge an exit load of 1-2% if you redeem your investment within a year.

Liquidity

Gold ETFs are traded on stock exchanges, and their liquidity depends on the number of buyers in the market. The ETF market is relatively small in India, so gold ETFs are less liquid. In contrast, gold mutual funds are more liquid and can be easily purchased and sold.

Pricing

The price of gold ETF units is based on real-time updates from the stock exchange. Gold mutual fund units, on the other hand, are priced through the Net Asset Value (NAV), which is disclosed at the end of the trading hours.

Control

With gold ETFs, you have direct control over your holdings, while gold mutual funds are actively managed by a fund manager who makes investment decisions on your behalf.

Both gold mutual funds and gold ETFs offer a convenient way to invest in gold without having to deal with the challenges of owning physical gold. Gold mutual funds are suitable for investors who want to make regular, long-term investments, while gold ETFs are a good choice if you prefer the flexibility of trading on the stock exchange and plan to convert your holdings into physical gold.

Gold Mutual Funds: Things to Consider

Gold mutual funds are a great way to invest in gold without having to physically buy and store it. They are open-ended funds that invest in gold reserves, either directly or indirectly. The Asset Management Company (AMC) invests in stocks of gold-producing companies, gold distributing syndicates, mining companies, Gold ETFs, and physical gold. Here are some things to consider before investing in gold mutual funds:

Fund Management Fees

Gold funds in India follow a "fund of funds" structure, investing in Gold Exchange-Traded Funds (ETFs). This structure has a higher expense ratio than investing directly in Gold ETFs, but it is still lower than the costs of securely storing physical gold.

Asset Allocation Considerations

Gold as an asset class is best suited for diversifying an equity-heavy portfolio. Gold and equity are negatively correlated, meaning when equities are down, gold prices rise, and vice versa. Therefore, gold funds should not be the only investment in your portfolio. Allocate your investments to other asset classes like equity, debt, etc., depending on your risk tolerance.

Taxation

Gold mutual funds follow the same taxation rules as debt mutual funds. If you hold gold mutual fund units for less than three years before redemption, Short-Term Capital Gains (STCG) tax applies, and the rate depends on the investor's tax slab rate. If you hold the units for three years or more, Long-Term Capital Gains (LTCG) tax applies, with a rate of 20% with indexation.

Lower Returns

Gold may not provide exceptionally high returns compared to equities. During a market crisis, investors often view gold as a safer option, but they may switch to riskier investments like stocks and bonds once the market recovers. Therefore, gold may not be ideal for long-term wealth creation.

Seasonal Behaviour

Gold's performance tends to be seasonal, providing higher returns during market insecurity. At other times, it may lag behind other asset classes. As a result, gold can be more like an insurance cover than a pure investment.

Dynamic Portfolio Allocation

Gold can be a tactical allocation in your portfolio. During a market depression, you may consider allocating a larger portion of your portfolio to gold. As the market recovers, gradually shift your allocations to better-performing asset classes.

Gold Mutual Funds: How to Invest

Gold mutual funds are a type of investment fund that focuses on gold and related securities. They are a good way to gain exposure to gold without having to physically hold it. Gold funds are open-ended funds that invest in units of a Gold Exchange-Traded Fund (ETF). The primary aim of gold funds is to create wealth by leveraging the potential of gold as a commodity.

Benefits of Gold Mutual Funds

Gold mutual funds offer several advantages over investing in physical gold:

• Minimal storage costs: Physical gold requires secure storage in vaults or lockers, which can be costly. Gold fund investments are stored digitally, with only a minimal expense ratio cost.
• Lower acquisition costs: Physical gold purchases often incur additional charges such as making charges, customs duty, and taxes. Gold funds only have the expense ratio as a cost.
• Higher liquidity: Buying and selling physical gold can be cumbersome and may not always fetch fair market value. Gold fund units, on the other hand, can be easily purchased and redeemed from the Asset Management Company or via the stock market.
• No purity concerns: Physical gold, especially jewellery, may have purity issues. Gold mutual funds ensure the purity of the gold used as security for issuing fund units.

Things to Consider

When investing in gold mutual funds, there are a few key points to keep in mind:

• Fund management fees: Gold funds have a fund of fund structure, investing in Gold ETFs. This results in a higher expense ratio compared to direct investment in Gold ETFs. However, this expense is still lower than the cost of securely storing physical gold.
• Asset allocation: Gold is best suited for diversifying an equity-heavy portfolio as it is negatively correlated with equities. Gold funds should not be the sole investment in a portfolio, and investors should also allocate assets to other classes like equity and debt, depending on their risk tolerance.
• Taxation: Gold mutual funds are taxed as per the capital gains taxation rules of Debt Mutual Funds. Short-term capital gains tax applies to units held for less than 3 years, while long-term capital gains tax (20% with indexation) applies for units held longer.

How to Invest

Investing in gold mutual funds can be done through an investment account with a platform like ET Money, which offers direct plans of gold mutual funds. Alternatively, investors can use a demat and trading account to purchase listed gold fund units from the stock market. It is not mandatory to have a demat or trading account to invest in gold funds.

Gold Mutual Funds: Taxation

Gold Mutual Funds are subject to the capital gains taxation rules that apply to Debt Mutual Funds. The tax treatment of gold funds varies according to the length of time the units are held for and the date of purchase.

Gold Mutual Funds Taxation Rules:

• Gold Mutual Fund units held for 3 years or less prior to redemption are subject to short-term capital gains tax (STCG). These are taxed according to the income tax slab rate of the investor.
• Gold Mutual Fund units held for over 3 years are subject to long-term capital gains tax (LTCG) rules. LTCG are taxed at a flat rate of 20% with indexation.
• Gold Mutual Fund units bought until 31 March 2023 are treated and taxed like physical gold. These become long-term capital assets if held for 36 months or more.
• Profits on the sale of Gold Mutual Funds bought after 31 March 2013 will be taxed as short-term capital gains, irrespective of the holding period. These will be taxed like bank fixed deposits.
• Gold Mutual Funds with up to 35% equity exposure to domestic companies are taxed according to the investor's income tax slab rate.

Gold Mutual Funds: Advantages

Gold mutual funds are a relatively new concept, having been around for only two decades. They are a type of mutual fund that directly or indirectly invests in gold reserves, gold ETFs, and gold-related instruments such as bullion, coins, etc. Here are some advantages of investing in gold mutual funds:

Protection from Inflation

Gold prices have always been on the increase due to their finite supply, making gold mutual funds a strong choice for long-term investments. Gold is often seen as a hedge against inflation and other economic uncertainties.

Flexibility of Investments

Gold mutual funds provide flexibility by enabling investors to monitor their investments using SMS, 24/7 phone support, and various internet access options such as websites, chat, and email. This allows investors to better understand when to sell or buy more.

Easy to Track

Investors can always check the current fund value online or by calling a toll-free number, making it easier to keep track of their portfolio values.

Liquidity

Gold mutual funds offer the ability to redeem mutual fund units whenever desired for par value. All types of investors can easily and conveniently use the assets thanks to the redemption option.

Safer Investment

Gold has traditionally been a secure investment choice. Gold mutual funds are also very popular with investors due to their accessibility, liquidity options, and low cost. They are regulated by the Securities and Exchange Board of India (SEBI), which monitors and reports on the condition of these funds, helping investors measure and predict their returns.

Minimal Storage Costs

Physical gold requires secure storage in vaults and lockers, which can be costly. Gold fund investments, on the other hand, are stored digitally in your investment or Demat account, with only a minimal expense ratio cost for maintenance.

Low Cost of Acquisition

Purchasing physical gold incurs charges beyond the actual cost, such as making charges for jewelry, customs duty, and GST. Gold funds only have the expense ratio as a cost, making them a lower-cost investment option.

Higher Liquidity

Buying and selling physical gold can be cumbersome, and it's difficult to guarantee a fair market value in an emergency. In contrast, gold fund units can be easily purchased and redeemed from the Asset Management Company or via the stock market.

No Purity Concerns

Physical gold, especially jewelry, often has purity concerns. Gold mutual funds, however, ensure the purity of the gold being used as security for issuing fund units.

Frequently asked questions