Should you consider gold mutual funds?
Gold seems to be coming down from the highs it went to this year. If you are planning to invest in gold now and don’t understand gold ETFs, look at gold mutual funds.
Finally, gold prices have come down from their highs. Gold prices had touched Rs. 57,950 per 10 grams this year. Now, they are around Rs. 49,000. If you want to invest in gold, gold mutual funds might be better investments than physical gold. You can redeem your investment easily and also benefit from higher gold prices.
What are gold mutual funds?
Gold mutual funds are open-ended funds that invest in Gold Exchange Traded Funds (ETF). The net asset value (NAV) of gold mutual funds are linked to performance of the underlying ETFs. If you didn’t know, gold ETFs gather money from investors to invest in gold bullion that are having purity of 99.5 per cent. The aim of ETFs is to track the price of domestic physical gold prices. The ETF represents gold in terms of units and are listed on the stock exchanges. On the stock exchange, one can buy and sell the ETF units.
Do gold funds reflect gold prices?
Yes. There’s an indirect link between gold mutual funds and the gold prices. Any fluctuation in gold prices will affect gold ETFs which in turn will impact the NAVs of the gold mutual funds.
As gold mutual funds invest in gold ETFs, gold mutual funds make returns based on the movement in the gold ETFs. So, the NAV of the funds change based on the price of the gold ETFs in which they have invested. So, by investing in a gold mutual fund, you will benefit from the change in gold prices.
Why gold funds may be better than gold ETFs?
It’s easier to invest in gold mutual funds when compared to gold ETFs. You can approach the fund house or invest online in gold mutual funds through a distributor. However, to invest in gold ETFs, you need to have a demat account.
Another advantage with gold mutual funds is that investors can choose to invest in them through the Systematic Investment Plan (SIP) route while this facility is not available with gold ETFs. So, only seasoned investors who can time the market might prefer investing in gold ETFs. Gold mutual funds are preferred by retail investors who want to lower their investment costs.
The minimum investment for gold ETFs is higher as there is no SIP. You will need to invest at least one unit of gold if you choose gold ETFs as your investment. This is about Rs. 4,900. You can invest in gold mutual funds for Rs. 1,000 which is best suited for retail investors.
Gold ETFs invest mostly in gold bullion only. They don’t have any other investments. 90 to 100 per cent of the assets of a gold ETF are invested in 99.5 per cent pure gold while the remaining is invested in debt. Gold mutual funds can keep their investments flexible and can reduce their gold ETF investments when markets touch highs.
The value of your gold mutual funds is in terms of rupees as the gold investments are based on the NAV of the fund. For gold ETFs the minimum investment is based on the grams of gold you invest. So, it is easy to get the value of your investment.
Investors can choose the dividend option in gold mutual funds. These dividends are usually paid out of realised gains of the funds and not from the income of the fund.
How are gold mutual funds better than gold bonds?
The Reserve Bank of India-backed Sovereign gold bonds allow you invest in gold online and offer an annual 2.5% interest over and above the price of gold on the day of maturity. However, gold bonds do not offer the SIP option. Also, gold mutual funds are more liquid than gold bonds. Why? This is because gold bonds have a tenure of 8 years.
What about gold mutual funds taxation?
Investments in gold mutual funds are regarded as long-term if they are for more than three years and the gains from the investments are called long-term capital gains (LTCG). The LTCG on gold mutual funds are taxed at 20% with indexation benefit. Short-term capital gains (STCG) on gold mutual funds are taxed as per the tax bracket applicable to the investor.
How to choose gold mutual funds?
You will need to look at the returns that the gold mutual fund has provided in comparison to physical gold. If the returns are higher or similar to that of physical gold, it means that the fund is worth considering. You can look for the average returns generated by other gold mutual funds just to make sure that you have chosen the best one. You will need to look at the expense ratio of the gold funds. The lower the expense ratio, the higher will be your returns from the fund.
If you don’t have the time to choose gold ETFs, need professional fund management and are looking for smaller investment amounts, you might find gold mutual funds are a good investment avenue.