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Mutual funds that invest in gold reserves either directly or indirectly are known as gold funds. Typically, investments are placed in physical gold, mining company equities, and stocks of syndicates that produce and distribute gold. However, investing in an asset without needing to buy it in tangible form is a convenient way to do it.
Open-ended investments in gold are called mutual funds, and they are based on the units that the gold exchange-traded fund offers. Since the underlying asset is stored in actual gold, the price of this precious metal directly affects the asset’s value.
How gold mutual funds work?
To invest in a gold MF, an investor can purchase shares in the fund, similar to buying stocks. The value of all these shares is determined by the performance of all underlying assets held by the fund.
As mentioned earlier, gold mutual funds India can invest in various forms of gold. Some funds may hold physical gold bars or coins, while others may invest in gold mining companies or other related assets. Depending on the fund’s objectives, the fund manager will make strategic investment decisions to achieve those goals.
The performance of a gold mutual fund is directly linked to the price of gold. If the price of gold goes up, so does the value of the fund’s assets and, therefore, the value of the fund’s shares. Similarly, if the price of gold falls, so does the value of the fund’s assets and its shares.
Benefits of investing in gold mutual funds in India
- Diversification
Investing in a gold mutual fund allows you to diversify portfolio beyond traditional investments like stocks, bonds, etc. This can help reduce risk as well as protect against market volatility.
- Professional Management
Gold mutual funds India are only managed by professionals who have a deep understanding of the gold market. They can make well-informed investment decisions on your behalf, saving you time and effort.
- Liquidity
Unlike physical gold, which may take time to sell and convert into cash, gold mutual fund stocks can be easily purchased and sold on stock exchanges. This makes them a more liquid investment option.
- Lower Costs
Investing in physical gold often comes with additional costs, like storage fees and insurance premiums. Gold mutual funds, on the other hand, have lower expenses and management fees, making them a cost-effective way to invest in gold.
Disadvantages of gold mutual funds
- Market Risk
As with any investment, gold mutual funds are subject to market risks. The value of the fund can go up or down depending on the performance of the underlying assets.
- No Guarantee of Returns
While gold is generally considered the safest asset, there is no guarantee that a gold mutual fund will generate positive returns. Economic and political factors can also impact the price of gold and, therefore, the performance of the fund.
- Lack of Control
As an investor in a gold mutual fund, you have no control over the investment decisions made by the fund manager. This means you must trust their expertise and judgment to manage your money effectively.
Who should invest in gold funds?
For individuals looking to reduce investment risk and diversify their holdings, gold mutual funds are a great option. Because it is governed by the SEBI, investing in mutual funds carries less risk.
The fund is allocated to gold bullions, which are tangible assets that are mostly unaffected by changes in the financial markets. It is, therefore, appropriate for conservative investors as well.
Investments in gold funds are also an option for tax-smart investors. These investments are exempt from TDS; instead, only the taxation on gold mutual funds related to the purchase and sale of jewelry are applied to these funds.
What is the difference between gold ETF vs gold mutual fund?
| Aspect | Gold Funds | Gold ETFs |
| Structure | Gold funds invest in varied forms of gold, like physical gold, gold mining companies, and gold futures. | Gold ETFs are ETFs that are backed by physical gold bullion held by the fund. |
| Investment method | Investors buy units or shares of the mutual fund, which are managed by a fund manager who makes investment decisions on behalf of all the traders or investors. | Investors buy shares of the ETF, which are traded on stock exchanges just like stocks. |
| Liquidity | Mutual funds can buy or sell at the end of every trading day at the fund’s net asset value (NAV). | ETFs can be bought or sold all over the trading day at market prices like stocks. |
| Expense ratio | Gold funds typically have higher expense ratios compared to Gold ETFs due to the active management by the fund manager. | Gold ETFs generally have lower expense ratios since they are passively managed and do not require active decision-making. |
| Minimum investment | Mutual funds usually have higher minimum investment requirements compared to ETFs, making them less accessible to small investors. | ETFs typically have lower minimum investment requirements, allowing investors to start with smaller amounts. |
| Transparency | Mutual funds are needed to disclose their holdings periodically, usually on a quarterly basis. | ETFs provide real-time transparency as their holdings are disclosed on a daily basis. |
| Tax implications | Mutual funds may generate capital gains distributions, which are taxable events for investors. | ETFs are more tax-efficient as investors can control when to realize capital gains by buying and selling shares on the stock exchange. |
How to invest in gold mutual funds?
Investing in a gold mutual fund is relatively simple. It can be done in a few steps:
- Research
Start by researching different gold mutual funds and their investment strategies to find the one that perfectly aligns with your investment goals.
- Choose a fund
Once you have identified a suitable fund, you can buy stocks through their brokerage account or directly from the fund organizations.
- Monitor performance
Keep an eye on the performance of your fund and make adjustments as needed to ensure it aligns with your investment objectives.
- Consult a financial advisor
If you’re new to investing or unsure about which fund to choose, consider consulting a financial advisor who can guide you in making the best decision for your financial goals.
The bottom line
Gold mutual funds offer investors an accessible and convenient way to invest in gold without having to deal with the challenges of physical gold ownership. However, like any investment, it’s important to do thorough research and consult a professional advisor before making any investment decisions. By understanding how gold mutual funds work and their pros and disadvantages, you can make informed choices and potentially reap the benefits of this precious metal in your investment portfolio.
FAQs
The value of a gold mutual fund’s shares is directly affected by the performance of its underlying assets, which are typically tied to the price of gold.
No, the fund manager makes all investment decisions in a gold mutual fund on behalf of investors. Investors have no control over these decisions.
Diversification helps reduce risk and protect against market volatility, as assets such as stocks and bonds may not perform well during economic downturns.
Yes, as with any investment, there is a risk of market volatility and potential losses. Economic and political factors can also impact the performance of gold mutual funds.