In the year 2020, when stock markets were plummeting, gold mutual fund investors enjoyed the benefits of a sudden and sharp rise in gold prices. With an approximate growth of 38.10% in one year between 2019 and 2020, that made for a substantial return on investment. As gold mutual funds rallied, more investors are now considering incorporating gold mutual funds within their investment portfolio.
Here, we will explain the concept of gold mutual funds and also share some of the top rate gold funds for investor reference.
Understanding the concept of gold funds
Gold mutual funds essentially invest in different forms of gold, primarily in gold ETFs or exchange-traded funds. The common objective of these funds is to mimic domestic gold price movements through an actively managed fund. These funds are managed by professional fund managers and are sought after by investors who prefer to include gold exposure within their portfolio.
How do gold mutual funds invest?
Gold mutual funds invest in gold ETFs, which in turn, pool funds from large investors to invest in high grade gold bullion. A gold ETF unit represents physical gold and is listed on stock exchanges for investors to buy and sell these units. This indirectly refers to buying and selling of gold.
Gold mutual funds generate returns through movements of gold ETF prices. In simple terms, the price or NAV of a gold mutual fund will change as per the price movements of gold ETFs that the fund is invested in. Gold ETF prices move as per fluctuations in gold prices. Thus, when an investor invests in gold mutual funds, he/she gains exposure to gold price movements.
How do investors of gold mutual funds fetch returns?
Investing in a gold mutual fund means investing in gold at the ongoing or current gold rates. At the time of redemption of the mutual fund units, the investor earns returns as per ongoing sale price of gold. If, at redemption, the price of gold is higher than the price of investment, the investor can make gains on the investment and vice versa.
Reasons to invest in gold mutual funds
The main reason why investors often consider investing in gold mutual funds is to avoid the hassle of owning physical gold while still benefiting from gold exposure. Here’s a look at some of the top reasons to consider investing in gold mutual funds:
Gold price appreciation
Since the value of gold has mostly appreciated over the years, gold mutual funds can offer positive returns on investment as compared to the higher risk of loss in the other fund categories.
Portfolio diversification
Gold mutual fund investments can be used to relevance the risk element of an investment portfolio as these allow exposure to low-risk stocks of gold manufacturing and gold mining companies.
Resistance to market movements
Gold has the ability to resist sudden capital market movements while appreciating in value. These can also act as a hedge against inflation and can therefore make for a comparatively safer investment alternative.
Demat account not mandatory
One can invest in a gold mutual fund without requiring a demat account by approaching an established mutual fund provider like Fisdom .
Systematic Investment Plan (SIP)
By investing in gold mutual funds through the SIP option, an investor can adopt a disciplined investment approach for long-term gains. SIP also allows better planning of finances by considering the investment needs every month.
Liquidity
It is easy to enter and exit gold mutual funds, as these are highly liquid. This allows investors to have the required financial support in case of any emergencies.
No storage costs
Storing physical gold involves substantial costs in the form of bank locker fees that are getting expensive day by day. Since gold mutual funds are in digital format, there is generally no hassle of storage costs or fear of theft involved.
How are gold mutual funds taxed?
Just like physical gold, gold mutual fund returns are taxable as per the capital gains generated and respective holding period.
- If a gold fund is held for a minimum of 3 years, the applicable tax rate is 20% on the capital gains with indexation benefits.
- If a holding period is below 3 years, capital gains are taxable at per the investor’s income tax slab rate.
Things to note while investing in gold mutual funds
Some of the factors that investors should note while investing in gold mutual funds are:
- As compared to equity mutual funds, gold mutual funds may offer below-superior or average returns in the long term.
- The fund management charges could double since an investor might have to pay for fund management fees of gold mutual funds and the gold ETF in which the mutual fund is invested.
- Gold mutual funds normally do not declare dividends, unlike equity or debt funds.
Top rated gold mutual funds
Listed here are some of the top rated gold mutual funds and key information on them for investor reference.
HDFC Gold Fund
About the Fund
The scheme aims to fetch capital appreciation for investors by primarily investing in units of HDFC Gold Exchange Traded Fund.
| Inception Date | January 01, 2013 |
| Benchmark Name | Domestic Price of Gold |
| Fund Manager | Krishan Daga |
| Expense Ratio | 0.15% |
| Risk | Moderately high |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| -4.27% | 10.74% | 14.32% | 10.73% | 4.00% |
SBI gold fund
About the Fund
The scheme aims to generate returns that match the returns of SBI Gold Exchange Traded Scheme (erstwhile SBI Gold Exchange Traded Scheme).
| Inception Date | January 01, 2013 |
| Benchmark Name | Domestic Price of Gold |
| Fund Manager | Raviprakash Sharma |
| Expense Ratio | 0.10% |
| Risk | Moderately high |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| -4.48% | 10.68% | 14.41% | 10.47% | 4.01% |
ICICI Prudential Regular Gold Savings Fund
About the Fund
This scheme aims to generate returns through investment in ICICI Prudential Gold ETF.
| Inception Date | January 01, 2013 |
| Benchmark Name | Domestic Price of Gold |
| Fund Manager | Manish BanthiaNishit Patel |
| Expense Ratio | 0.09% |
| Risk | Moderately high |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| -4.17% | 10.54% | 14.20% | 10.95% | 4.03% |
Conclusion
While investing in gold mutual funds can offer overall portfolio diversification to balance the risk-return element, it is important that investors consider all the available investment options before finalising on one. This can help in maximising returns to achieve individual investment objectives.
FAQs
To invest in some of the top rate gold mutual funds, you can download the Fisdom app on your smartphone. This app allows seamless access to a variety of mutual funds, including gold funds. You can easily register yourself on the app and begin investing in the funds of choice.
To measure the performance of a Gold ETF, the commonly used factor is ‘tracking error’. This factor helps to measure the performance of the Gold ETF against the benchmark index it mirrors. A lower tracking error indicates good performance.
Gold funds are best suited for investors who wish to diversify their portfolio through exposure to different asset classes. Investors who don’t want the hassle of maintaining physical gold can invest in gold funds.
Gold funds are impacted by the movements in gold prices. Apart from the risk of price drops, gold funds are safe investments as compared to physical gold, which carries the risk of theft.
You can begin with a minimum investment amount of Rs. 1,000 for investing in gold funds through the SIP mode.
