Gold funds are fund of funds scheme that invest in gold exchange traded funds. Their underlying scheme invests in gold ETFs and rely on investments directly linked to gold prices. It is useful to invest in an asset without purchasing it in its physical form. As the fundamental asset is held in the form of physical gold, its value is directly dependent on the price of gold.
Gold mutual funds are open-ended investments; the units offered depend on the units offered by the gold Exchange Traded Fund.
In India, the primary purpose of gold funds is to diversification of portfolio and help in reducing market risk.
In order to select the best gold funds, an investor should consider the following:
• Taxability:
Investments in gold mutual funds for more than 3 years are regarded as long-term. The LTCG on gold is taxed at a 20% rate with indexation benefit (plus surcharge, if any, and cess), while short-term capital gains (STCG) are taxed at the appropriate the slab rate applicable to the investor.
• Flexible investment amount:
In India, Gold funds offer greater convenience than physical gold as it allows investors to purchase any amount as per their requirement. An investor can invest either through a lump sum amount or through an SIP as per her/his convenience. Hence, consider your investment goals before making the investment.
• Comparison with similar funds:
To invest in the best gold fund, an investor should examine the returns that the gold mutual fund has offered as compared to physical gold.
Also, one should compare the average returns and expense ratios of other gold mutual funds because the low expense ratio will fetch you higher returns. Assess the consistency of fund performance to select a gold fund in 2021.
• Liquidity:
Gold ETFs in India enjoy high liquidity and can be easily traded in the stock exchange at the prevailing price.
• Diversify investment portfolio: As of 2021, Gold mutual funds in India are a good investment option to diversify one’s investment portfolio and reduce overall market risk.
1 Gold ETF unit is generally the equivalent of 1 or ½ gram gold depending on the scheme. So, one obtains the dual benefit of stock trading as well as gold investments. Gold funds in India can also be helpful against economic vagaries because of it negative correlation with other asset classes.
In India, the value of Gold ETFs increases/decreases in proportion to the price of physical gold. These ETFs maintain the purity of gold and also ensures a uniform availability across the country.
To conclude, select a gold fund depending on your investment goals and tax implications.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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