The technology-driven world has opened several new avenues for investors. With its myriad schemes, gold continues to enjoy the status of one of the trustable modes of investment. The year 2020 was a year of uncertainties for many investors as the Sensex fell radically, making the equity funds holders the worst sufferers. However, gold mutual funds investors continued to thrive. In the same year, the return on SENSEX and gold was 16% and 28%. Though it cannot be denied that holding physical gold comes with its risks and expenses, the current gold schemes help in overcoming these challenges. Gold Funds are fast becoming a preference among investors who wish to hedge against inflation risks.
What are Gold Funds?
Gold Funds aka Fund of Funds (FoF) are a kind of mutual funds that directly or indirectly invest in gold reserves – both in Indian and International markets. While some gold funds are invested in stocks of gold producing and distribution syndicates, Gold ETFs, and physical gold, some are invested in stocks of gold mining companies. Moreover, the investor doesn’t require to open a Demat account to invest in Gold Funds.
Gold Funds are pooled investments that take the form of mutual funds or exchange-traded funds (ETFs). The investors are issued ‘units’ and each Gold Fund unit is equal in value. The value of Gold Funds directly depends on the value of the shiny metal. This value is known as the Net Asset Value (NAV) and when it increases, the investments grow.
To understand this better, let’s suppose a Gold Fund is invested in gold worth Rs 5 crores. The NAV of the fund would be this amount divided by the total number of ‘units’ issued by the fund. So, in this case, if the total number of units issued by the fund is 5 lakhs, then the NAV of the fund would be Rs 100. This NAV gets updated at the end of trading time every day.
Who should invest in Gold Funds?
Investors who wish to diversify their portfolio and lower the risk of investment should opt for Gold Funds. Since gold funds are regulated by the SEBI, they lower the risk associated with investing in mutual funds. They also save on the taxes as TDS is not applicable on such investments .Gold Funds are considered an apt choice for conservative investors.
Taxation on Gold Funds
In India, taxation on Gold Funds is quite like the way taxes are levied on gold jewellery. They are also levied based on the tenure of the investment. If you sell gold funds before 3 years (36 months), the profits will be considered Short-Term Gains and will be duly added to your annual income and taxed according to the prevailing income tax slab. However, if you sell them after 3 years, the profit will be counted as Long-Term Gains and 20% tax will be applicable along with indexation.
Benefits and Limitations of Gold Funds: -
Benefits
1. Protection from Equity Markets – if the equity markets are plummeting, gold prices would rise
2. which saves the investors from fluctuating markets
3. Buying one gram of gold may cost around Rs 4600. However, an investor can buy gold mutual funds with just Rs 100 a month.
4. It is a hedge against inflation
5. Selling becomes profitable – when an investor sells physical gold, the jeweller will cost 2% of making charges. However, on gold mutual funds, one can redeem for the existing price of gold without any deduction.
6. No expenses on storage of the physical gold
7. Diversified portfolio—when one invests in gold, he/she get exposure to different gold companies.
8. Gold funds are safe investments as they are regulated by SEBI
9. Assurance of purity of gold
Limitations
1. Unlike equities, gold funds offer low returns. Once the market gets stable, many investors may go back to equities for a better return.
2. An investor ends up paying double fund management charges. The fund is invested in buying units of gold ETFs. These gold ETFs will then buy the actual physical gold.
3. No dividends are declared on gold funds
4. Prices of gold are controlled by international markets
Moneycontrol journalists were not involved in the creation of the article
