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Sep 06, 2011, 09.47 AM IST | Source: Moneycontrol.com

SBI Gold Fund: Time right to look at gold funds?

The glitter of gold is far brighter today than before. The yellow metal touched Rs 28,000 per 10 gram, making it far too expensive for the burgeoning middle class who exhibit maximum buyer interest but have limited financial strength. Here is a viable option for them: Check out gold funds!

SBI Gold Fund: Time right to look at gold funds?
Saikat Das
Moneycontrol.com

The glitter of gold is far brighter today than before. The yellow metal touched Rs 28,000 per 10 gram, making it far too expensive for the burgeoning middle class who exhibit maximum buyer interest but have limited financial strength. Here is a viable option for them: Check out gold funds!

"This type of investment is ideal for a small investor who may not be disciplined," says Brijesh Damodaran, founder and CEO of Wealthways, a Delhi-based financial advisory firm. Gold funds do not require opening any demat account and the trading method is very much like with gold ETFs. The tax benefits are equal to that of gold ETFs. “At a time when gold is so expensive, investors can buy this paper gold in small quantity every month. This will help make for the traditionally advised 10% gold investment in the entire portfolio,” Damodaran says.

What is a gold fund?

It is a mutual fund that invests in units of gold exchange traded funds or ETFs. In mutual fund parlance, it is called a fund of fund scheme. You can get the benefit of investing through a systematic investment plan (SIP) with a minimum amount of Rs 500 per month. Essentially, you are buying paper gold every month.

In India, gold funds do not have a long track record. SBI Mutual Fund recently launched a gold scheme from August 22 which will close on September 5. This fund will invest in units of SBI Gold ETF.

This fund is the fourth such fund in a series, the other three funds including Reliance Gold Savings, Kotak Gold and Quantum Gold Savings. All of them are relatively new, launched over the past six months. Interestingly, the fund values have risen nearly 19-20% in last three months. This is the time that investors saw significant shrinkage in their equity portfolios, thanks to the volatility at the bourses.

"Going forward, an upside of around 10-15% is expected from those gold funds in next one year,” says Hiren Dhakan, associate fund manager, Bonanza Portfolio. “Even if gold prices are at an all-time high, chances of any sharp correction are highly unlikely,” he says. The fact remains that all central banks across the globe are trying to push up their gold reserve. With the debt crisis still looming large, both in US and EU, the demand for the precious metal is bound to continue. “It is better to buy paper gold regularly in the form of SIP,” he advices.

Where the gold funds fork path with ETFs is that the charge of buying gold funds are higher than in gold ETFs. While ETFs charge only around 0.30% of your investment as brokerage cost, fund management fee in gold funds are upto 1-2.25%.

Nonetheless, like gold ETFs, redeeming units of gold funds before one year of investment will fetch short-term capital gain tax. Any redemption after a year will also fetch long-term capital gain tax but with indexation benefits. This means that your profits (which are taxable) will be calculated considering rising prices or inflation.

How does a gold ETF work?

Fund managers of gold ETFs invest money in physical gold. The funds’ performance is benchmarked to gold prices directly. However, minimum investment in gold ETF is 1 gram, which is equivalent to Rs 2,700-2,800 at the current market price. It also does not offer any SIP facility.

saikat.das@network18online.com

Q UTI was the only mutual fund for the period of:

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