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written by | September 13, 2022

Investment in Gold Funds: Definition and How to Invest?

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Gold as a wealth has had a special place since ancient times. The concept of preserving wealth is more significant within the economic environment where investors witness decline in U.S dollar and rise in inflation. Gold acts as a hedge for each scenario especially during a rising inflation.

The gold fund is an open-ended mutual fund or exchange-traded fund that invests in companies that extract gold or make jewellery to mimic the performance of gold. Most gold investment funds are invested in stocks of gold producers and distributors, physical gold and mining companies. 

Without purchasing the commodity physically, it gives investors ownership of an asset. A gold mutual fund is an open-ended, unit-based investment based on the gold exchange-traded fund. Physical gold is the underlying asset, so its value is directly tied to the price of gold. Gold funds can also protect investors from economic shocks by acting as a hedge.

To protect themselves from fluctuating market conditions, many investors diversify their investment portfolio with 10% to 20% investment in gold funds.

Did You Know? Gold investment purchases are rising faster than jewellery purchases. The investment to jewellery ratio is approximately 20:80, according to WGC. 

Also read: Hallmark Gold - Understand Hallmark, KDM, and 916 Varieties of Gold

Why Should You Invest in Gold Funds?

Real gold investments are risky since they require storage, and theft risk is also present. A gold fund is a good option for those who want to invest in gold but don't want the risk of storing it.

A significant drawback of investing in real gold is that when you try to sell it, there is always an issue of impurity that the buyer subtracts from the price of gold. Therefore, it is easier to buy gold funds than real gold to eliminate the problem of storage and impurity.

Real gold cannot be invested in small amounts. The smallest amount you can invest in real gold is one gram, which is the smallest quantity that can be purchased. Gold prices fluctuate every month, so 1 gram of gold will change every month. Hence, when buying real gold, it’s tough to plan for a systematic investment. Also, storing such a small amount of gold will be difficult. A gold fund can avoid all problems. Monthly investments are made at the same rate, and no storage factor is involved.

How Does a Gold Fund Work?

A gold fund invests in units of a gold exchange-traded fund (ETF).

ETF gold stands for exchange-traded fund which tracks the domestic physical gold price. These are passive investment tools based upon gold price and invest in gold bullion.

 Gold funds are primarily designed to create wealth by utilizing gold's potential as a commodity. The fund is suitable for investors who wish to gain exposure to gold. Instead of holding gold sensibly, investing in gold through gold funds is convenient. A professional fund manager can help you take advantage of the same advantages as holding gold physically.

Investing in this fund is the same as investing in other mutual funds. It involves the following steps:

Step 1: Creating a plan with proper research can provide a foundation for successful investment

Step 2: Access personal factors such as time horizon, goals, risk profile, and preparedness

Step 3: It is significant to find a dealer who the government endorses for ensuring safety

Step 4: Comparison of gold dealer prices for the best option

Step 5: Educate yourself with gold terms

Step 6: Decide upon investment time-frame

Step 7: Choose the initial investment amount

Step 8: Diversify the investment

Step 9: Gold Fund prices are based on net asset value per unit of the fund. Essentially, the net asset value of a fund is the value left after the fund's liabilities have been deducted. If there are 100000 units and the Net Asset Value of the fund is 

₹10 lakhs, then the Net Asset Value per share is

                                    = ₹10 lakhs / 100000

                                    = ₹1000000/100000

                                    = ₹10. As a result, each unit can be purchased for ₹10.

Also read: Gold Price History - Know the Change in Gold Price Chart India in Last 10 years

What Are the Steps to Investing in Gold Funds? 

  • It is possible to purchase these units directly from the fund without having a Demat Account.
  • You can purchase the fund's units directly from the fund house.
  • A fund's price is determined by the price of gold and also by the stock price of the company it invests in.
  • As a result, the Net Asset Value per Unit fluctuates daily.
  • When purchasing a unit, one must purchase at the previous day's NAV/Share once the order is placed.
  • The fund's transfer agent will complete the investor's legal work and pass the order to the fund.
  • Investors will receive units once the fund processes their order.
  • In addition, standing instructions can be given to deduct money from the bank and transfer it to the Fund House each month.

Investor's Considerations

Safest Investment: 

While gold can yield higher returns than equities, it may not be as high as equities. Gold is viewed as a safer haven when markets are in a crisis. Investors may switch to riskier options like stocks and bonds as soon as their confidence returns. Hence, the gold savings fund can be considered a short-term investment option.

Seasonal Behavior: 

When it comes to gold's performance, there is a tendency for it to vary with the seasons. It gives relatively higher returns only when the market is insecure. You may find it lagging behind other asset classes at other times. This scenario can make gold seem more like an insurance policy than an investment.

Best Option to Diversify Portfolio: 

The best way to spread the risk of an investor's portfolio is to diversify into gold. Gold may not be an ideal asset class for portfolio diversification for investors with small to medium-sized portfolios. Gold has a limited ability to generate optimal returns as compared to other asset classes. Large portfolios, however, can allocate a smaller amount to gold as a risk cover without compromising their overall success.

Dynamic Portfolio Allocation: 

Investing in the best gold mutual fund is a good idea. It may be a better option to allocate some portion of your portfolio to it. Nonetheless, being tactical is the only way to go about it. If there is a market depression, you may consider allocating a greater portion of your portfolio to gold. On the other hand, you may want to shift your allocations to better asset classes as the market recovers. You may benefit from a dynamic approach when it comes to gold investing.

Best Gold Mutual Funds in India

It is important to analyse a fund from different angles when selecting one. Various quantitative and qualitative parameters can be used to determine the best gold funds for your needs. Also, keep in mind your financial goals, risk appetite, and investment horizon. Based on the past five years' returns, the following table shows India's top five gold funds. Depending on your investment horizon, you can choose funds that will yield returns over five to ten years. Additionally, you may consider financial ratios.

Fund Name

Return per annum

Axis Gold Fund

11.11%

Kotak Gold Fund

10.93%

SBI Gold Fund 

10.87%

ICICI Prudential Regular Gold Savings Fund

10.8%

HDFC Gold Fund

10.73%

Also read: Understanding Different Gold Types - An Overview on Gold Varieties

What Makes Gold Funds Different from Gold ETFs?

Investors should know the differences between gold ETFs and gold funds.  

Buying an ETF is like buying gold in an electronic form. It is similar to trading in stocks. While making a redeem you do not get physical gold but receive cash which is equivalent. Trade of ETF occurs through a dematerialized account also known as Demat and a broker that makes it extremely convenient for investing electronically. 

The differences between Gold Funds and Gold ETFs are -

Pricing: 

A gold fund's unit price is different from that of a gold ETF's unit price. Gold fund units are priced by NAV, which is disclosed at the end of trading hours. You can, however, get real-time updates on gold ETFs' prices since they are listed on the stock exchange.

Mode of Investment: 

Stock exchanges allow you to purchase gold ETF units, just like equity shares. Investing in these funds requires a Demat account, however. Units of gold funds can be purchased from the fund house without a Demat account, just like units of other mutual funds.

SIPs: 

SIPs can be used to invest in gold funds. SIPs are not allowed for gold ETFs.

Cost of Transaction: 

Investing in gold ETFs has no transaction costs. Gold funds may charge an exit load when redeeming your units within the predefined lock-in period.

Expense Ratio: 

Gold funds require more expenditures than gold ETFs. Because gold funds invest in gold ETFs, the expense ratios of the former would also include expenses associated with the latter.

Liquidity: 

Gold ETFs are more liquid than gold funds since they are listed on stock exchanges. You can buy or sell units during market hours without incurring exit loads in the gold ETFs. By selling units back to the fund house on the NAV of the day.

Also read: Understanding Gold ETFs And How to Invest in Best Gold ETFs

Conclusion

Having a Gold Fund is essential since it provides a clear picture of the gold market. Gold is a good investment for people who want exposure to the precious metal but don't want to take the risk of losing it. There are several benefits to holding this asset, such as diversification, and it can be taken as an alternative to buying gold. Gold savings funds are beneficial in many ways, as outlined in this article, which will give you an insight into their potential and how they can protect your other investments.

Follow Khatabook for the latest updates, news blogs, and articles related to the gold industry.

FAQs

Q: How are gold funds taxed?

Ans:

Your short-term capital gains from these funds will be added to your taxable income, whereas your long-term capital gains will be subject to either a flat 10% tax or a 20% indexation tax.

Q: How do I choose a Gold Fund?

Ans:

Gold mutual funds that are designed to provide long-term returns (eight years or more) will calculate the returns based on the current market value of gold.

Q: What is the best way to invest in gold?

Ans:

The best way is to purchase a Gold Savings Fund, Gold Bar or Coins.

Q: Which is better Gold ETF or Gold Mutual Fund?

Ans:

In a gold exchange-traded fund (ETF), 99.5% pure gold is invested, while in a gold fund, it is invested in gold ETFs.

Q: Is it safe to invest in Gold Mutual Funds?

Ans:

A gold fund can be used to protect against inflation and geopolitical instability. It's a simple way to diversify your investment portfolio. As gold prices do not fluctuate frequently, it is a safe investment option.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.