On the auspicious occasion of Akshaya Tritiya, many investors wish to invest in gold. But Moneycontrol has always recommended buying paper gold, than buying the physical form. Gold bonds or mutual funds are easier to handle and there is no problem when it comes to valuation.
Sovereign gold bonds (SGBs) are probably the best way to invest in the yellow metal via the paper form. These are issued by the government of India through the Reserve bank of India (RBI). Apart from passively-tracking the price of gold, these bonds also pay 2.5 percent interest a year, semi-annually. But so far this year, the RBI hasn’t yet come out with a new tranche of SGB. Buying existing listed tranches, issued previously, from the stock exchanges is one way out. But a systematic investment plan (SIP) in SGB isn’t possible.
Enter gold mutual funds.
What are gold mutual funds?
These are fund of funds (FoFs). They invest predominantly in gold Exchange Traded Funds (ETFs), which in turn invest in the physical gold of 99.5 or higher purity. A gold fund’s net asset value (NAV) is linked to gold’s price in the local market.
Currently, there are 10 gold funds available, with collective assets under management of over Rs 5,400 crore. These gold funds invest in their own gold ETFs. Since they are passively managed, the returns are close to those the gold ETFs. The one-year return is 0.2 percent. The return over a five-year period is 8.3 percent.
How do gold mutual funds enable SIP?
The good part about gold MFs is that they allow systematic investment plan (SIP). SGBs don’t allow SIPs.
“SIPs in gold funds are convenient for the retail investors. Gold ETFs and SGBs are more suited for DIY (do-it-yourself) investors,” says Chetan Gill, a Chandigarh-based mutual fund distributor. SIP can help you ride out the volatility in gold prices without taking on the risk of bad timing. To be sure, you can hold gold mutual funds in demat mode too. You can start your SIP in a gold fund with as little as Rs 500 a month.
It’s easier also to sell your gold mutual fund, as opposed to SGBs and gold ETFs. SBGs and ETFs suffer from lack of liquidity. But you can buy and sell gold MFs at the prevailing NAV at any time.
Double expense ratios
Gold funds incur expense ratios twice over, which is a disadvantage.
“Gold FoFs invest in the units of their own mutual fund Gold ETFs. The FoF structure creates a double layer of costs – the first being the expense ratio of the FoF itself and the expense ratio is of the underlying gold ETF,” explains Gill.
The average expense ratio of the regular plans of gold funds was 0.49 percent (as of April 2021), while that for gold ETFs was 0.7 percent. Eventually, investors end up bearing both costs.
“There is another school of thought in the US. Some Fund Houses such as T. Rowe Price and Vanguard offer FOFs that invest in their own schemes, and waive the additional expense ratio of the FoF and only incorporate the expense ratio of the underlying scheme. Such an option is a cheaper, but it is still not available in any FoF in India. It may come up in the future as the industry matures and grows,” adds Gill.
Gold funds attract exit loads of 1 percent (most cases) if redeemed within a year from the date of allotment.
Is it a good time to buy gold?
After a stupendous rise through 2019 and much of 2020, gold prices fell significantly from their highs.
Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum AMC says, “Since the start of 2021, gold has been under further pressure on account of the dollar and US bond yields that have strengthened on expectations of a quick US economic recovery triggering inflation, as the Federal Reserve insists on keeping interest rates near zero till 2023.”
However, the last one month has seen upward movement in the gold prices.
“With many countries, including India, currently seeing a resurgence in COVID-19 cases, risk and uncertainty on the pandemic front are back. New waves and variants of the virus are taking a toll on the fragile economic recovery, which could trigger pullbacks in risky assets such as equities. Gold could benefit from the resulting risk aversion, just like it did last year,” adds Mehta.
Gold may not be an outperforming asset class but can be a hedge against market uncertainties and a useful portfolio diversifier. It can account for 5-10 per cent of your portfolio at any point of time.
Gold funds and gold ETFs are having similar tax implications. Redemption of gold funds will attract a long-term capital gains tax of 20 percent (for a holding period of more than 36 months). But if you sell these bonds before 36 months, then you have to pay short-term capital gains tax at your slab rate.