​Gold Mutual Funds​

Simply put, gold mutual funds invest in gold indirectly. A Gold Mutual Fund is an open-ended fund of fund, mutual fund scheme that invests in Gold s. Gold ETFs is an exchange-traded fund that tracks the domestic physical price of gold. These are investments that mirror the gold prices and invest in gold bullion. With a gold fund, you can benefit from investing in a gold ETF without having a Demat account and leveraging a fund manager’s expertise. 

Gold as an underlying asset has benefits that every investor in India is well versed with. Hence a gold mutual fund offers the convenience of mutual funds and the benefits of gold, like liquidity, value and hedge against inflation, in a single investment. So, an investor can opt for a *  Systematic Investment Plan option and invest in the gold fund, which will invest in Gold ETFs.

A mutual fund pools all investors' money and invests in a particular asset, in this case, the gold ETFs. These ETFs trade the gold bullion on the stock exchange. The ETFs represent gold in terms of units; these are listed on the stock exchange, and investors trade on them. So indirectly, the investors are buying and selling gold.  So how do gold funds earn returns? Like any other mutual fund, in the case of gold mutual funds too, the returns are generated by the movement in the price of the underlying asset. So as gold prices that are influenced by global gold prices, duties, and exchange rates vary, the gold ETF prices move, and in turn, the NAV of the mutual fund also changes. So when an investor invests, the units will be allocated at the current price of gold, and when the investment is redeemed, it will be at the prevailing price. The investor will make capital gains depending on the movement of gold prices. So now we know what gold funds are and how they work.

Investing in gold mutual funds is simple and quick. Unlike the challenges inherent to buying or selling gold, investing in gold funds is easy and convenient. Investment in gold funds can be made through various methods: 

• Directly through the AMC 
• Through a financial advisor
• Through a distributor
• An investor can also invest in gold funds by submitting the duly completed form attached with a cheque or draft at the office of designated Investor Service centres (ISC)/ Registrar & Transfer Agents (RTA) of mutual funds

The investor needs to be KYC compliant irrespective of the method chosen. If the investor invests through an advisor or broker, they will ensure the submission of duly completed forms and supporting documents. If the investor opts for the online option, the investor must complete the KYC process online and create an account to transact. 

The investor can select the gold funds to invest in and invest directly in them. Gold funds can be invested through periodic investments called SIP, lumpsum, or both. Nippon India offers multiple channels for investors to invest by SMS, Mobile apps, website, and physical form. The process is simple and secure as the One Time Passwords (OTPs) are sent to the investor's registered email address and mobile number. Even payment options are many to ensure maximum convenience for the investor.

Gold as an asset has always been a store of value. Although it is no longer a currency, it still offers liquidity and value. So investing in gold funds has the following benefits:

• With gold funds, as an investor you can start small. With the Systematic Investment Plan (SIP)+. There are no storage costs or fear of theft compared to physical gold.
• Mutual funds inculcate the habit of saving, and gold funds are no exception. With SIP an investor can save a certain sum of money periodically. This habit of saving leads to periodic investments, which derive compounding benefits.
• Gold funds mean that you indirectly buy gold that will stand the test of time and has been shown to fetch returns. Gold as an asset is a store of value.
• Gold funds are portfolio diversifiers and provide a cushion against market movements. Gold and equity are inversely correlated; hence, historically it is observed that gold may rise whenever equity falls.
• Gold fund may provide a hedge against inflation.. Rise in gold prices can help in beating inflation.
• Gold Funds are professionally managed by a Fund Manager who devises strategies to meet the fund’s goals. An investor does not have to monitor gold prices continuously.
• Gold funds can prove to be cost-effective as there are no making or storage costs involved in this form of investment in gold compared to the physical form of gold.
• SIPs in gold funds can be redeemed easily without restriction on the redemption amount. Also, the investor does not incur a penalty for premature withdrawal.
• With gold mutual funds, an investor can benefit from rupee averaging as reduced gold prices would mean buying more units for an X amount, and rising prices would mean buying fewer units for the same amount. Thus, the benefit of a reduced average cost is available to an investor.

Long-term Capital Gains

Long-term capital gain is attracted in respect of units, held for a period of more than 36 months.

• Long-term capital gains will be chargeable to tax under section 112 of the Act, at the rate of 20 % with indexation benefits. In case of resident individuals and HUFs, where the total income as reduced by capital gains, is below the basic exemption limit, the long-term capital gains will be reduced to the extent of the shortfall and only the balance long-term capital gains will be subjected to the 20 % tax with indexation benefit.
• For tax on long-term capital gains in case of non-residents investors are followings Listed Securities @ 20% with indexation benefits. Unlisted Securities @ 10% without indexation and foreign currency fluctuation benefits

Short-term Capital Gains

Short-term capital gain is attracted in respect of units held for less than 36 months.

• Short term capital gain is added to the total income of the assessee and taxed at the applicable slab rates specified by the Act.

While Gold Mutual Funds can be of value in an investor's portfolio, every investor must consider a few factors before investing in Gold Funds. 

• Investment Goals: Every investment must align with the investor’s financial goals. Gold fund returns alone will not be enough to meet a long-term goal, but it can be good as a provision for a celebration like a marriage in the near future. Hence the goals and expectations from the investment must be clearly defined.
• Risk appetite: Gold funds come with lower risk; hence, if the investor is conservative and low-risk is prioritised, investment in gold funds can be higher. 
• Costs and tax payments: Costs in the form of the expense ratio and entry and exit load must be considered. Tax attracted on redemption must also be kept in mind. A comparison between all the forms of gold investments must be made. 
• Logical Decision: Investing in Gold funds must be a logical decision, and the decision to invest must be reviewed. Since the underlying asset is gold, sentiments must be kept at bay. 
• Returns: Gold funds do not generate returns in the form of dividends or interest, so this must be considered while investing in gold funds.
• Portfolio Diversification: Gold funds may perform well in times of market depression; however, they cannot be used as the only option for wealth creation. Gold funds must be included in the portfolio to cushion the market fluctuations of equity and help to diversify the portfolio.

Gold investment has been around for centuries and will continue to be. It has been a part of celebrations and inheritance. But when it is considered an investment, it must be done tactfully. Invest prudently, take advantage of market fluctuations and define the purpose of the investment so that redemption can be planned.