Gold mutual funds: Accumulate gold for financial goals with SIP
Many people prefer to accumulate gold in electronic format through gold exchange-traded funds (ETFs), gold mutual funds, digital gold, Sovereign Gold Bonds (SGBs). In the case of all the above ways, except for gold mutual funds, an investor has to invest manually every time if they want to accumulate gold regularly in small chunks. Only gold mutual funds provide the systematic investment plan (SIP) option to accumulate gold regularly in small chunks. A gold mutual fund SIP option is a convenient way to accumulate gold regularly for long-term financial goals like building a gold fund for a child’s marriage. This article discusses how to invest in gold mutual funds.
What are gold mutual funds?
A gold mutual fund is a financial product offered by various AMCs that allows investors to invest in gold in electronic format. A gold mutual fund collects money from investors and invests it in gold exchange-traded fund (ETF) units of the same AMC. The gold ETF further invests the money in physical gold on behalf of investors. The fund house allots you gold mutual fund units in proportion to your investment. One gold fund unit is equivalent to one gold ETF unit, which is usually equivalent to one gram of gold. The price of one unit of gold mutual fund tracks the price of one gold ETF unit, which in turn tracks the price of 1 gram of physical gold.
The gold mutual fund house declares the net asset value (NAV) of a single gold fund unit. Your profit or loss depends on the difference between the current price of one gold mutual fund unit and the price at which you bought the unit. Gold mutual funds are also known as gold fund of funds (FoF).
You don’t need a demat account to buy gold mutual fund units. You can invest in gold mutual fund units in a lump sum or start The purchase and redemption of gold mutual fund units are done through the mutual fund house.
Who should invest in gold mutual funds?
The following individuals should invest in gold mutual funds:
- Portfolio diversification through asset allocation: As an investor, if you want to spread your investment portfolio among various asset classes to diversify your risk, you should invest in gold mutual funds for the gold portion of your investment portfolio.
- To create wealth: Gold as an asset class has done well in the past and has given good returns to investors. So, if you want to create wealth, you should invest in gold mutual funds.
- Safe haven: Gold acts as a safe haven during stock market downturns due to events such as recession, war, pandemic, political instability, etc. So, if you are looking for a safe haven during such events, you should invest in gold mutual funds.
- Inflation hedge: Gold acts as a hedge against inflation. So, if you wish to protect your investment portfolio against inflation, you should invest in gold mutual funds.
Taxation of gold mutual funds
Let us understand the taxation of gold mutual funds:
- Short-term capital gains (STCG) tax: If you sell your gold mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
- Long-term capital gains (LTCG) tax: If you sell your gold mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.
Risks involved in gold mutual funds
Your near-term returns from gold mutual funds depend on whether gold is in an upcycle or a down cycle at the time of your investment. However, long-term investors need not worry about the upcycle or down cycle. You can regularly invest in Gold mutual funds and benefit from the power of compounding in the long run.
You can start a systematic investment plan (SIP) in a gold mutual fund for regular disciplined investing.
What are the advantages of gold mutual funds?
- Gold mutual funds give you an opportunity to invest in gold in electronic format. So, you don’t need to worry about purity. You also don’t need to incur storage costs like bank lockers and insurance costs.
- You can invest in gold mutual fund units without a Demat account, unlike gold ETFs where a Demat account is compulsory.
- You can start a SIP for investing in gold mutual funds, which is not possible in the case of gold ETFs.
- You can invest in fractional units in gold mutual funds, unlike gold ETFs where the minimum investment amount is one unit, which is equivalent to the price of 1 gram of gold.
Reasons to invest in gold mutual funds
For many individuals, one of the biggest reasons for investing in gold mutual funds is to accumulate gold for long-term financial goals, such as accumulating gold for your child’s marriage. Apart from that, people invest in gold for capital gains, to hedge their investment against inflation, and as a safe haven against economic uncertainties.
Asset allocation: Gold mutual funds provide investment portfolio diversification
Asset allocation requires individuals to diversify their investment portfolio across various asset classes such as equity, gold, fixed income, real estate, etc. Gold mutual funds are a good financial product to invest the gold allocation portion of your investment portfolio.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice/ recommendation to any party of solicitation to buy, sell or hold any investment. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers should exercise due caution and / or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein and shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.