What Are Gold Mutual Funds? Meaning And Basics

What Are Gold Mutual Funds?

Gold mutual funds are types of mutual funds that invest in gold-related assets. These are gold exchange-traded funds (ETFs), bullion, coins, or stocks of gold mining companies. Gold mutual funds allow you to gain exposure to gold without the need to buy physical gold. These funds do not directly invest in physical gold. Instead, they track gold prices through ETFs.

Open-ended and professionally managed, gold mutual funds allow you to benefit from long-term increases in gold prices. When gold prices go up, so does the value of these funds. You can start small through systematic investment plans (SIPs). As gold mutual funds are open-ended, you can exit anytime. This allows you to access your money whenever you need to.

How Gold Mutual Funds Work?

Let us understand how gold mutual funds work. Normal mutual funds pool money from different investors. The fund manager invests this money in various underlying assets, such as equities and debt, in line with the fund’s objective and investment mandate.

Gold mutual funds work in a similar fashion. However, there is a little difference. In gold mutual funds, the fund collects money and invests it in gold ETFs. Gold ETFs invest in gold bullion, and their units are traded on stock exchanges. The bullion in which gold ETFs invest is of high purity (usually 99.5%). So, when you invest in gold mutual funds:

• The fund manager uses the money to purchase gold ETF units.
• Physical gold backs these ETFs.
• The value of ETFs changes with market price changes.
• Accordingly, the fund's net asset value (NAV) changes.
• You can redeem your gold funds like any other mutual fund.

Therefore, when you invest in gold mutual funds, you do not invest directly in gold. You invest in gold ETFs that hold physical gold of high purity.

Types Of Gold Mutual Funds

Abundant choice is one of the hallmarks of mutual funds. Gold mutual funds are no different. You can choose from a range of funds as per your needs. Some of the popular types of gold mutual funds are:

Gold-ETF Backed Funds

These funds are mutual funds investing in gold ETFs. A gold ETF tracks the price of physical gold in the domestic market. Instead of buying physical gold, investors purchase units of gold ETFs. Your investment value moves in line with gold's market price. Managed by professional fund managers, these funds allow you to invest in gold without worrying about storing it.

International Gold Funds

Want to go global with your gold investments? You can opt for international gold funds. These funds invest in gold-related assets worldwide. In other words, they invest your money into international gold ETFs and global gold mining companies. The performance of these funds is linked to international gold prices. If global gold prices rise, the fund generally performs well.

Fund of Funds

A gold fund of funds (FoF) is a mutual fund that primarily invests in other gold-related funds. This again is usually gold ETFs. Let us understand it with an example. Suppose you invest ₹10,000 in an ABC gold FoF. This FoF does not invest in physical gold.

Instead, it invests your money in another gold-focused ETF, say XYZ Gold ETF. The XYZ ETF uses pooled funds from you and others to invest in high-purity physical gold.

Benefits Of Investing In Gold Mutual Funds

While rising gold prices are the main benefit of investing in gold mutual funds, several other benefits are also available. These include

Easy to Buy and Sell

Quick liquidity is one of the key advantages of gold mutual funds. If you want money on short notice for any emergency, you can easily sell your gold funds. Whether the market is rising or falling, you can enter or exit your investments anytime you want to.

Portfolio Diversification

Portfolio diversification is a fundamental investing principle, and gold mutual fund investment helps you diversify your portfolio. By doing so, you ensure that your portfolio’s performance is not dependent on a single asset class. It helps spread risk and hedge against inflation.

Low Minimum Investment

If you think you need a large amount to invest in gold mutual funds, relax. It is not required. You can start investing as little as ₹100 or ₹500 through a systematic investment plan (SIP). An SIP investment involves investing a fixed amount on a fixed date. The low investment amount is to ensure that anybody can invest in gold funds.

Tax Efficiency and Transparency

Gold mutual funds are highly tax-efficient. Taxation of gold mutual funds depends on the holding period. If the holding period is less than 12 months, you need to pay a short-term capital gains (STCG) tax. On the other hand, if the holding period is more than 12 months, you need to pay a long-term capital gains (LTCG) tax.

The STCG tax is applicable as per your tax slab. LTCG tax is charged at a flat rate of 12.5%. Also, daily NAV publication and periodic disclosure of holdings and portfolio details make gold mutual funds highly transparent.

Risks And Limitations Of Gold Mutual Funds

Every investment, regardless of its nature, carries some risk. Gold mutual funds are no different. Some of the risks associated with them are:

Swing in Gold Prices

Gold prices are not static. They move up and down. While they have risen recently, there is no guarantee they will remain elevated. If prices fall, it can affect your investment value.

Management Risk

Professional fund managers manage gold mutual funds. While they do their best to ensure optimal performance, their decisions can sometimes backfire. If it happens, your investment may suffer.

Effect of Global Events

The shine of gold is universal. Hence, global events can significantly affect its performance. Tariff wars, geopolitical events, or government regulations all impact gold. A negative impact can affect your fund’s performance.

No Regular Income

Do you seek regular income through dividends in gold mutual funds? If yes, you are likely to be disappointed. This is because they do not offer any dividends. Any gains come primarily from price appreciation. If prices appreciate, you can make meaningful gains. If not, your investment may suffer.

Who Should Invest In Gold Mutual Funds?

While anybody can invest in gold mutual funds, they are more suitable for those who:

Do Not Want to Buy Physical Gold

If you do not want to buy physical gold due to purity and storage issues, you can invest in gold mutual funds. They allow you to own gold without actually buying it.

Want to Invest a Small Amount Upfront

If you do not want to invest a large amount upfront, you can opt for gold mutual funds. With an amount as little as ₹100 or ₹500, which is less than a cup of coffee at a 5-star restaurant, you can start small.

Want Hedge Against Inflation

Are you constantly worried about inflation eating your money and want to hedge your portfolio? If yes, you can opt for gold mutual funds. This is because gold is seen as a hedge against inflation. It is usually considered a safe haven.

How To Invest In Gold Mutual Funds?

To invest in gold mutual funds:

• Complete your KYC if you are a first-time investor.
• Choose the fund you want to invest in. Check past performance, expense ratio and fund manager's expertise.
• Decide between SIP and a lump sum investment.
• Choose the platform through which you want to invest. This could be the fund's official website or an investment app.
• Track your investment.

Conclusion

Gold remains a popular asset class to invest in. Investing in gold mutual funds is a cost-effective and convenient way to invest in the metal without owning it physically. It not only helps you diversify your portfolio but also benefit from potential long-term price appreciation.

Sources:

Times of India
Economic Times
ClearTax