Ever since the pandemic tightened its grip over the world and the equity markets turned towards volatility, many investors have their eyes set on the yellow metal — Gold — as a safe haven investment. As per World Gold Council statistics, the demand for gold in India surged 37% to 140 tonnes during Jan-Mar 2021. However, many bullion experts suggest a better alternative if you want to invest in this precious metal; Gold Funds.
Simply put, a Gold Fund is an open-ended investment product that invests in Gold ETFs — a passive investment instrument that tracks the domestic price of gold and invests in it. Their NAV is linked to the performance of the underlying physical Gold price with 99.5% purity.
Many investors look at Gold Funds as a hedge for protection against financial setbacks. These types of Mutual Funds in India can also help in diversifying your investment portfolio. However, not every investor knows about the underlying factors while investing in these funds.
Let’s look at some of the benefits of investing in Gold Funds-
1. Hedge against risk
It has historically been seen that the performance of Gold as an asset class is inversely proportional to that of Equity. So, if you diversify your investments between Equity and Gold, you create a cushion against the volatility that Equity Investments bring. When equity markets fall, the demand for gold moves up. And if gold prices fall, the equity markets naturally rise. Thus, these two types of asset classes in your portfolio help in portfolio diversification.
2. No making charges
When we buy physical gold in the form of a piece of jewellery, there is always the element of ‘making charges’ associated with it, which is an additional transactional cost. Even if you want to sell the jewellery at a later period, the same amount will be deducted from the amount paid to you. On the other hand, investing in Gold Funds comes with no such added ‘making charge’ because the fund invests in units of Gold ETF of 99.5% purity. Note that AMCs do charge an expense ratio on Gold Funds.
3. No storage hassle/cost
One has to often worry about storing the physical gold, such that it is not exposed to theft/burglary. Also, there are always chances of physical gold getting lost or misplaced. To counter this, many of the gold buyers end up owning lockers for security, which can be an added cost. Gold Funds save you from all these hassles by providing you access to Gold as an asset and, at the same time, not having you worry about how to store it.
4. Systematic Investment
Investment in Gold Funds can be made systematically in fixed amounts at regular intervals. This fixed amount does not need to be very high, it can be as low as ₹ 100 and the timeline you can choose to invest could be weekly, monthly, annually, and semi-annually, as per your convenience.
Know the Differences Between Physical Gold and Gold Funds
Many beginner investors fall into believing in the myth that investing in Gold Funds equals buying physical gold. The truth is - there are several differences between the two. Gold Funds, also known as paper gold, are an alternative way to invest in gold without facing the inconvenience of buying, storing, and reselling this physical metal. Also, the amount invested in Gold Funds is utilised to buy gold of the highest purity - 99.5%, while it is difficult to appraise the actual purity of physical gold purchased in the form of jewellery as it is available in varying degrees of purity. Knowing these differences could help you set the right expectations from your investments in Gold Funds.
For your plan to invest in gold, you can take the route of Gold Funds and start a SIP. Keep it as a small part of your total investment portfolio — based on your risk appetite and asset allocation decision — and then focus on the stability it might offer.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates ”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.