Gold Fund Investment: Best Options For Your Portfolio

Gold has long been a valuable commodity, and investing in gold funds is a popular way to diversify your portfolio. Gold funds can be a hedge against inflation, stock market volatility, and falling currency values. There are several ways to invest in gold, including gold hedge funds, exchange-traded funds (ETFs), gold-backed securities, gold mining stocks, gold mutual funds, and gold futures options.

Gold mutual funds are a common way to invest in gold, and these funds often invest in gold mining companies. Gold ETFs, on the other hand, are exposed to gold prices by investing in bullion or gold futures. When choosing between a gold mutual fund and a gold ETF, it's important to consider your investment goals and portfolio needs. ETFs are often used as a hedge against inflation or market decline, while mutual funds will move with the market and the value of the company.

Some popular gold funds include the Invesco India Gold Fund, SBI Gold Fund, Axis Gold Fund, and Aditya Birla Sun Life Gold Fund. Gold ETFs like the iShares Gold Micro ETF, Invesco DB Precious Metals Fund, and SPDR Gold Trust are also popular choices.

Gold Mutual Funds vs Gold ETFs

Gold mutual funds and gold ETFs (Exchange-Traded Funds) are two popular ways to invest in gold without having to hold the physical commodity. While both options offer exposure to gold as an asset class, there are several key differences between them in terms of pricing, investment mode, costs, liquidity, and more.

Pricing

Gold ETFs are listed on stock exchanges and their prices can be tracked in real-time. In contrast, the price of gold fund units is based on the Net Asset Value (NAV), which is disclosed at the end of the trading hours.

Investment Mode

Gold ETFs can be purchased on a stock exchange, similar to equity shares, but they require a Demat account. Gold funds, on the other hand, can be bought directly from the fund house without the need for a Demat account, just like other mutual funds.

SIPs

Gold funds offer the flexibility of investing through Systematic Investment Plans (SIPs), with a low minimum investment amount of around Rs. 500 to Rs. 1,000. Gold ETFs, however, do not support SIPs and typically require a minimum investment of one unit, equivalent to one gram of gold.

Transaction Costs

Gold ETFs generally do not incur transaction costs, while gold funds may charge an exit load if units are redeemed within a predefined period (usually one year). Gold funds also tend to have higher expense ratios since they invest in gold ETFs and incur additional fees.

Liquidity

Gold ETFs offer higher liquidity due to their listing on stock exchanges. Investors can buy or sell ETF units at any time during market hours without exit loads. Gold funds, while still liquid, are redeemed by selling them back to the fund house based on the NAV of the day.

Other Considerations

Gold ETFs provide direct control over holdings and track the price of physical gold passively. Gold mutual funds, on the other hand, are actively managed by fund managers and may invest in gold ETFs, gold mining companies, or other securities. Gold funds may be suitable for investors seeking regular investments over a long period, while ETFs are a good choice for those who may eventually want to convert their holdings into physical gold.

Gold as a hedge strategy

Gold is a popular hedge investment for several reasons. Firstly, it serves as a hedge against currency devaluation, particularly the US dollar. When the dollar weakens, gold becomes more affordable to hold and tends to appreciate in value. Secondly, gold acts as a defence against inflation. As the cost of living rises, the stock market often declines, and gold provides a stable investment that increases in value during market volatility. Thirdly, gold has been used as a hedge against deflation, which occurs when prices drop and the economy enters a downturn with excessive debt. Finally, gold can be used as a general portfolio hedge due to its negative correlation with stocks, bonds, and other financial instruments, helping to reduce volatility and risk.

There are several ways to invest in gold as a hedge:

• Physical Gold: Buying physical gold, such as bullion coins or bars, offers the most direct exposure to gold and adds diversification from digital assets.
• Gold ETFs: Gold exchange-traded funds (ETFs) are a common way to add gold as a hedge. They trade on stock exchanges and offer exposure to gold price movements or gold mining stocks.
• Gold Futures: A gold futures contract allows investors to buy or sell gold at a specified price and date in the future. The futures market is often paper trading, with settlements made in cash, and it offers flexibility without management fees.

When considering gold as a hedge, it's important to evaluate different gold funds and their past performance, Net Asset Value (NAV), and returns over various periods. Gold mutual funds, such as those offered by SBI, Axis, and ICICI Prudential, are also popular investment options in India.

Advantages of investing in gold

Gold is a popular form of investment in India, with families treasuring it for generations. Here are some of the advantages of investing in gold:

Hedge Against Inflation

Gold has shown positive results during economic downturns and market volatility, making it a good hedge against inflation. It has seen strong asset appreciation in the long term and is a must-have in one’s investment portfolio. Gold's value rises when inflation rises, making it a more stable investment than cash.

Portfolio Diversification

Gold is a convenient way to diversify your investment portfolio. It is a safe haven for investors when the equity markets are down. Gold investments can act as a safety net against market volatility as gold has a low correlation with the equity or stock markets.

Start with a Small Amount

You can start investing in gold with a small amount and save regularly for the long term. Gold Mutual Funds, for example, allow investors to start a SIP with a nominal amount of as low as Rs 1,000.

Easy Liquidity

Gold is fairly liquid in nature, making it easy to sell. Gold ETFs, in particular, may be the most liquid option. You can subscribe and redeem your gold fund as and when you need to.

Tax Benefits

Some gold funds, like the SBI Gold Fund, are treated as non-equity products from a tax perspective. You can claim long-term capital gains tax benefits on these funds after investing for at least one year.

Gold funds vs physical gold

Gold has long been a popular investment option, especially during times of economic uncertainty. There are several ways to invest in gold, including buying physical gold or investing in gold funds. So, what are the key differences between these two options, and which is the better choice? Let's take a closer look.

Physical Gold

Physical gold provides direct exposure to gold as a tangible asset. When you buy physical gold, you have possession of the gold, which can be in the form of bullion (gold bars or coins), or jewellery. The value of physical gold is based on its mass, purity, and the current market price. While physical gold offers a sense of security during economic downturns, there are some drawbacks to consider. Firstly, buying physical gold can be expensive due to dealer commissions, sales tax, and secure storage costs. Additionally, there may be processing fees for buyers making limited purchases. Selling physical gold can also be challenging and costly, as you need to find a buyer and may incur authentication costs. Another important consideration is the security and insurance of your physical gold, which can be costly, especially if you hold a significant amount.

Gold Funds

Gold funds, on the other hand, offer an indirect way of investing in gold. Instead of holding physical gold, you invest in financial instruments such as exchange-traded funds (ETFs), mutual funds, or gold-backed securities. Gold funds have become a popular route for gold investments due to their ease of trading, lower costs, and professional management.

Gold Exchange-Traded Funds (ETFs)

Gold ETFs are bought and sold on stock exchanges, and they track the price of gold. When you invest in a gold ETF, you don't own physical gold, but you benefit from the price movements of the metal. Gold ETFs offer higher liquidity than physical gold, making it easier to buy and sell shares quickly. Additionally, gold ETFs have lower costs over time compared to trading physical gold. While gold ETFs have management fees, they eliminate the need for secure storage and insurance, making them a more convenient option. It's important to note that gold ETFs are subject to counterparty risk and may not perfectly track the price of gold.

Gold Mutual Funds

Gold mutual funds are another option for investing in gold indirectly. These funds often invest in the stocks of companies that mine gold. Gold mutual funds can provide diversification to your portfolio and are suitable for investors who don't have a Demat account and are not stock investors. They also offer the advantage of systematic investments or withdrawals. However, it's important to note that gold mutual funds are subject to the same market risks as the companies they invest in.

So, which is the better investment option? The answer depends on your individual needs and investment goals. Physical gold may be preferred by those who want direct ownership and the security of holding a tangible asset. On the other hand, gold funds offer ease of trading, lower costs, and professional management. Gold ETFs, in particular, provide higher liquidity and are a more efficient way to gain exposure to the gold market. Ultimately, both options can be considered as part of a diversified investment portfolio, providing a hedge against economic uncertainty and inflation.

Gold funds and taxes

Gold funds are a great way to diversify your portfolio and create a hedging strategy. Gold is often used as a hedge against inflation, stock market declines, or falling currency prices.

When it comes to taxes on gold funds, there are a few things to keep in mind. Firstly, the taxes you pay will depend on the type of gold investment you choose. For example, if you invest in physical gold, such as jewellery, bars, or coins, you will be responsible for its safe storage and will need to pay taxes on any capital gains you make. On the other hand, if you invest in gold funds through a mutual fund or exchange-traded fund (ETF), the taxes may be different.

In general, gold mutual funds and ETFs are taxed based on the capital gains made and the holding period. If you hold the fund for less than a certain number of years (usually three), the capital gains will be taxed according to your income tax slab rate. If you hold the fund for a longer period, you will typically pay a tax rate of 20% or higher on the capital gains, with possible surcharges and cess depending on your location.

It's important to note that gold is typically classified as a collectible by tax authorities, which can impact the tax rate you pay. In some countries, such as the United States, gold is taxed at a maximum rate of 28% on long-term capital gains. However, if you hold gold for less than a year, any gains may be taxed as ordinary income, which could result in a higher tax rate.

Additionally, it's worth considering the taxes on any returns you make from gold investments. In some cases, you may be able to reinvest your returns into certain types of funds or property to gain tax exemptions.

Lastly, if you receive gold as a gift or inheritance, the taxes may vary depending on the relationship with the giver and the value of the gold.

Frequently asked questions