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8 Essentials of Investing in Gold Funds

Gold is a popular form of investment. This yellow metal is a symbol of prosperity and wealth. India is one of the largest importers of gold in the world and many use gold assets to obtain personal funds and hedge investment risks. If you are looking for investment in gold fund than that in physical format of gold such as gold bullion, coins, and jewellery, then there are some important facts to know.

Firstly, let us understand the different types of gold funds:

  • Gold ETFs (Exchange Traded Funds): Here, the investment asset is the physical gold. Returns on these are linked to price of gold. But, as an investor, you do not have to worry about theft or storage for the yellow metal. A DEMAT account is necessary to invest in gold ETFs.
  • Gold Mining Funds: Here, investments are made in companies involved in mining of gold. Returns from the funds are influenced by the performance of such companies.
  • Gold Fund of Fund: Here, the investment is done in units of gold ETF. You do not have create a DEMAT account to invest in these units.

Below provided are 8 essentials of investing in gold funds in a wise manner:

  1. Options in Gold Funds
    Every fund-house has its gold ETF and mutual funds, which invest in the gold ETFs. Global and domestic market prices of the gold affect the gold investments. This invested gold can be held in dematerialized (DEMAT) form, in a way that each gold fund unique equals to 1 gram of gold. Doing so will eliminate worries of the yellow metal’s security and storage.
  2. Gold Funds Diversify Your Investment Portfolio
    Making all the investments in single product can be risky, as huge loss valuation of the single-investment made, can bring the returns crashing down. Thus, it is always best not to put all your eggs in one basket. In other words, mutual funds should be diversified. For instance, rather than investing only in debt funds or equities, you must invest in gold funds as well as it will balance the risk, and provide stable expected returns.
    Thus, in an unfortunate event, if equities fall, the debt investment and gold funds will take care of the repercussions you have to face due to the volatility in the market.
  3. Gold Investment at Commodities Exchanges
    Gold in India is traded in three commodities exchanges: MCX (Multi Commodity Exchange of India), NCDEX (National Commodity and Derivatives Exchange), and National Multi Commodity Exchange of India (NMCE).
    Through commodities market, you can even invest in gold spot contracts and futures other than the gold funds. Here, gold is traded as spots and futures contracts than units. If you are adept in gold investing, you may explore these investments.
  4. Loan against Gold vs. Gold Funds
    Investing in gold funds is very different than become a private lender offering funds against physical gold asset. Both bring returns to the investors, but function uniquely. The gold funds and their returns are influenced by national and foreign related matters of economics, while returns from disbursing gold loan against physical yellow metal, like how banks/NFBCs do, depends on the financial discipline of the borrower.
    If the borrower does not repay the loan in timely manner, the expected returns from the loan- offered will be affected. You do have the option of selling the collateral gold to recover the dues. Gold fund on the other hand is dynamic and can give you variable return than a fixed one.
  5. Capital Gains Applicable
    Capital Gains taxation rule applies on gold funds as like debt mutual funds. As per the applicable criteria, capital gains tax can be either on short-term gains or long-term gains. In case the liquidation of gold fund investment in a year of the initial investment, a short-term capital gain tax is applied, as per the tax bracket you fall in. The long term capital gains feature tax rate as 20% without indexation and 10% with indexation.
  6. Sovereign Gold Bond
    It is important to know that sovereign gold bond issued by the Indian government is not a gold fund. It is not traded in the stock market. It cannot be liquidated in the stock market as well, which otherwise can be done to traditional gold funds. In a sovereign gold bond, you receive a fixed annual rate of return, in other words, there is a fixed interest earned on the investment in the bond.
    At the tenure’s end, the value you receive will be equal to that of the gold’s market value during redemption. The market-linked gold funds thus are different when it comes to returns and associated risks, which are comparatively higher.
  7. Effect of Market Demand and Supply on Gold Fund Value
    Market value of gold influences the value of gold funds. Thus, the latter is subjective to gold prices in India and overseas. Gold prices surge during economic turmoil. Investors then look for safe investments and invest in gold. As large numbers of investors purchase gold in digital or physical format, the gold prices increase given contraction in supply of the yellow metal. Thus, when domestic and global gold prices rise, the value of gold ETFs and funds also increase.
  8. Trade of Gold Funds
    Gold can be traded in commodities exchanges but it is different from selling and buying gold mutual fund units. In the latter, the investments are done in gold ETF or bullion, and these funds are traded in Nifty stock exchange or BSE-Sensex. Gold mutual funds usually invest in gold ETFs, and these may surface under debt fund category or funds-of-funds mutual funds.

So, Should You Invest in Gold Funds?

It is evident that gold funds are suitable as investment tools during economic uncertainty when equities underperform. These definitely help to diversify investment portfolio and seem to be an alternative to traditional mutual fund investment. It does hedge investment bets, but you must keep investment in gold funds within a limit, as price of gold is affected by inflation, and changes, demonetization in domestic and international economy, thus directly influencing the returns on gold funds.

Moreover, the capital gains tax combined can make the returns meagre in such circumstances. There is no tax benefits attached as well. As gold funds like any other mutual fund or exchange traded fund are subjected to market risks, in times or financial turmoil and market fluctuations, bank tax saver deposits, PPF, and other investment options may serve as a better deal.
That being said, investing in gold funds is not discouraged. However, you must study the market and investments made before making any investments be it in mutual fund or gold funds.