Gold Funds: A Smart Investment Move?

Gold funds are a type of mutual fund that can be a good way to diversify your portfolio and lower the risk of investment. They are ideal for investors who want to invest in gold as an asset without holding the physical commodity. Gold funds can also be used as a hedge to protect against economic shocks. However, gold funds offer lower returns compared to equities and may not be suitable for long-term wealth creation. Gold funds are taxed similarly to gold jewellery, and the tax rate depends on the investment duration.

Gold funds vs. physical gold

Gold has long been a popular investment option, especially during economic uncertainty, currency fluctuations, and wars. When considering investing in gold, you have the option of investing in physical gold or gold funds. Here is a detailed comparison between the two:

Physical Gold

Physical gold provides direct exposure to gold and can be purchased in various forms, such as bullion, coins, or jewellery. Bullion refers to gold in bulk form, which can be cast into bars or minted into coins. The value of bullion is based on its mass and purity rather than its monetary face value. The price of physical gold depends on the current market value of gold and the purity of the gold item.

Advantages of Physical Gold:

• Physical gold offers a tangible asset that provides a sense of security during economic downturns.
• It is generally easy to sell gold as there is a liquid market, and buyers are always available.

Disadvantages of Physical Gold:

• Physical gold incurs additional costs related to storage, insurance, and dealer markups.
• Selling physical gold can be challenging and costly as it may involve authentication processes and finding a buyer.
• There are security concerns associated with storing physical gold.

Gold Funds

Gold funds, also known as gold exchange-traded funds (ETFs), offer indirect investment in gold. Gold ETFs hold physical gold and their prices move with the price of gold over the short and long term. Gold funds provide higher liquidity than physical gold, allowing investors to buy and sell shares quickly through financial markets.

Advantages of Gold Funds:

• Gold funds are more liquid than physical gold, making it easier to enter and exit the investment.
• They do not require physical storage or insurance, simplifying the investment process.
• Gold funds are professionally managed, benefiting investors who are less familiar with the gold market.
• Gold funds typically have lower costs than physical gold due to lower expense ratios.

Disadvantages of Gold Funds:

• Gold funds do not provide direct ownership of physical gold.
• There are annual fees associated with gold funds, which can affect overall returns.
• Gold funds may not perfectly track the price of gold, leading to minor tracking errors.

In summary, physical gold offers direct ownership and a tangible asset but comes with higher costs and security concerns. On the other hand, gold funds provide indirect investment in gold, higher liquidity, and lower costs but lack the direct possession of physical gold. The choice between the two depends on your investment goals, risk tolerance, and preferences.

Gold funds as a hedge

Gold funds are a type of investment fund that holds assets related to gold. They are often used by investors who want to hedge against inflation and are popular among those who are bullish on the prospects of gold. Gold funds provide investors with exposure to gold without the high storage and insurance costs associated with owning physical gold.

There are two main types of gold funds: those that hold physical gold bullion, gold futures contracts, or those that invest in gold mining companies. Investors interested in hedging against inflation typically opt for gold funds holding bullion or futures, while those who are bullish on gold may also include gold mining companies in their portfolio.

Gold funds are usually structured as mutual funds or exchange-traded funds (ETFs). Mutual funds are often accessible through financial institutions like banks, while ETFs can be purchased directly on the stock exchange. Gold funds offer a convenient way to gain exposure to gold, providing investors with diversification and a hedge against market volatility.

Gold has historically served as a hedge against inflation and a store of value during economic downturns. It is also seen as a safe-haven asset, with investors turning to gold during times of political and economic uncertainty. The price of gold tends to rise when the U.S. dollar weakens, making it a good hedge against a declining dollar.

When investing in gold funds, it is important to consider the fees involved, such as management fees and performance fees. Additionally, the performance of a gold fund depends on the broader precious metals market as well as the fund manager's strategy and expertise. It is crucial to assess whether the fund can improve the risk-return characteristics of your investment while providing peace of mind.

In summary, gold funds can be a good option for investors seeking to hedge against inflation, diversify their portfolios, and gain exposure to gold without the challenges of owning physical gold. However, it is important to carefully evaluate the fees, performance, and expertise of the fund manager before investing.

Gold funds for diversification

Gold funds are a great way to diversify your portfolio and lower the risk of investment. They are a type of mutual fund that can be categorised as open-ended investments based on the units provided by the gold Exchange-Traded Fund (ETF). Gold funds are ideal for investors who want to secure themselves from a fluctuating market.

Gold funds are regulated by market regulators, such as the Securities and Exchange Board of India (SEBI), which lowers the risk associated with investing in a mutual fund. They are also insulated from financial market fluctuations, making them relatively stable and attractive to conservative investors.

Gold funds can be a good option for investors who want to generate wealth during the investment tenure and create a cushion against market fluctuations. The returns of the best gold funds can sometimes outgrow the actual price of the precious metal itself, offering a lucrative opportunity for investors.

However, it is important to note that gold funds offer lower returns compared to equities, and may not be a long-term option for wealth creation. They give relatively higher returns only during periods of market collapse. Additionally, gold funds are taxed similarly to gold jewellery and depend on the investment duration. For short-term investments of less than three years, the revenue is added to the investor's gross income to calculate tax, while for long-term investments of more than three years, gold funds are taxed at 20%.

Overall, gold funds can be a good option for investors who are looking to diversify their portfolios and protect themselves from market risks, especially during uncertain economic times.

Gold funds vs. equities

Gold funds and equities are two very different types of investments, each with its own advantages and disadvantages. Here are some key points to consider when comparing gold funds vs. equities:

Gold Funds

Gold funds, such as exchange-traded funds (ETFs), offer investors a way to invest in gold without having to physically purchase, store, and resell the metal. Gold ETFs typically track the price of gold, and each share of the ETF represents a portion of the gold held by the fund. These funds are traded on stock exchanges, and their value fluctuates with the price of gold. Gold funds offer higher liquidity than physical gold, making it easier to buy and sell shares. They also provide diversification, as the funds can invest in various gold-related industries, such as mining, manufacturing, and transportation. Additionally, gold funds are relatively easier to obtain and provide a simple way to invest in the gold industry. The expense ratios of gold funds are generally lower than the combined costs of buying, storing, and insuring physical gold. Gold ETFs are also considered safer than physical gold, as the gold is securely stored and insured by specialists.

However, one downside of gold funds is the potential for tracking errors, where the ETF price deviates from its reference asset. There is also counterparty risk, and investors do not physically own the gold. Additionally, gold funds may have annual fees that can affect overall returns.

Equities

Equities, or stocks, offer investors the opportunity to invest directly in companies, including those in the gold mining industry. Equities provide the potential for higher returns compared to gold funds, as the performance of individual stocks can be influenced by company-specific fundamentals such as profitability and expenses. Investing in equities also allows for more targeted investments, as investors can choose specific companies that align with their investment strategies.

On the other hand, equities typically carry more risk than gold funds, as individual stocks can be more volatile and are subject to company-specific risks. Investing in equities may also require more research and expertise, as investors need to analyse financial statements, industry trends, and market conditions to make informed decisions.

In summary, gold funds offer diversification, higher liquidity, and lower costs compared to equities. They are a more hands-off investment option, as the physical gold is managed by professionals. Equities, on the other hand, offer the potential for higher returns and more targeted investments but carry more risk and require more active management. The decision between investing in gold funds vs. equities ultimately depends on an investor's risk tolerance, investment goals, and level of involvement in the management of their portfolio.

Gold funds taxation

The tax treatment of gold funds varies depending on the type of fund and the jurisdiction. Here is a breakdown of the taxation rules for gold funds in different forms and locations:

Digital Gold Investment

For digital gold investment in India, returns on investments held for less than 36 months are not taxable directly. However, for long-term capital gains (LTCG) held for more than 36 months, a 20% tax is charged on returns, along with a surcharge and a 4% cess.

Physical Gold Investment

In India, individuals selling physical gold are subject to a 20% tax on long-term capital gains, plus a 4% cess. For short-term capital gains (STCG), the returns are added to the annual income and taxed according to the applicable income tax slab rate. Additionally, a Goods and Services Tax (GST) is payable when purchasing physical gold.

Paper Gold Investment

Paper gold investments, such as gold mutual funds and exchange-traded funds (ETFs), are taxed similarly to physical gold investments in India. A 20% tax plus a 4% cess is levied on long-term capital gains. For short-term capital gains (up to 36 months), the gains are added to other sources of income and taxed according to the applicable slab rates.

Sovereign Gold Bonds (SGBs)

In India, Sovereign Gold Bonds (SGBs) held until maturity or sold to the Reserve Bank of India (RBI) are tax-free. However, for SGBs sold in the secondary market, short-term capital gains are taxed at the applicable income tax slab rates if sold within 12 months. For long-term capital gains, a 12.5% tax is applicable without indexation benefits.

Gold Mutual Funds and ETFs

In the international context, the tax treatment of gold mutual funds and ETFs varies by country and jurisdiction. In some cases, gold funds may be taxed as collectibles, attracting higher tax rates than other investments. It is important to consult a tax advisor or expert to understand the specific tax implications for your location.

Gold Mining Companies

Investing in gold mining companies, either directly through stocks or as part of a fund, is generally taxed according to the standard rules for equity investments. The tax treatment will depend on the jurisdiction and the investor's individual circumstances.

Frequently asked questions