Gold Mutual Funds

Gold mutual funds are investment instruments that pool funds from multiple investors to purchase gold bullion or gold-related securities. Read the full blog to know more.
EXPLORE FUNDS
4 mins read
18-April-2024

Gold mutual funds are funds that pool money from investors to buy gold or gold-linked securities. This gives you exposure to gold's price movements, minus the hassle of storing and securing physical gold. Traditionally, people invest in physical gold, but in the modern financial landscape, there is a more convenient and diversified way to harness the benefits of gold – gold mutual funds. Let us explore gold mutual funds, understand what they are, their benefits, who should consider investing in them, and much more.

What is a gold fund?

A Gold mutual fund is a fund that primarily invests in various forms of gold, such as physical gold, gold-related securities, and mining stocks. These funds provide a convenient and cost-effective way for investors to add gold exposure to their portfolio without owning physical gold.

Benefits of investing in gold mutual funds in India

Let us explore the advantages of investing in gold mutual funds:

  1. Diversification: Gold Mutual Funds allow investors to diversify their portfolios, reducing overall risk. Gold is often considered a safe investment when stock markets face downturns.
  2. Professional management: These funds are managed by experienced professionals who make investment decisions based on market conditions. This can result in better returns compared to individual investments in gold.
  3. Liquidity: Selling gold jewellery or coins can be cumbersome and may lead to a loss due to making charges or differences in buy-sell prices. Gold Mutual Fund units, however, are highly liquid and can be easily bought or sold.
  4. No storage hassles: With physical gold, safe storage can be a concern. Gold Mutual Funds eliminate this issue as they are held electronically.
  5. Rupee cost averaging: Investors can benefit from rupee cost averaging by investing a fixed amount at regular intervals, which reduces the impact of market volatility.

Who shoul Iinvest in gold funds?

Gold mutual funds can be an ideal choice for several types of investors:

  • Portfolio diversification: Investors looking to diversify their portfolios can benefit from investing in gold funds since, as gold is commonly regarded as a secure investment during stock market downturns.
  • Individuals looking to buy physical gold: Those who plan to buy physical gold in the future, such as for weddings or other significant events, can start investing in Gold Mutual Funds and then redeem when needed.
  • Long-term investors: As gold tends to appreciate over time, long-term investors looking for wealth preservation can include gold funds in their investment strategy.

Categories of gold mutual funds

 

There are not really distinct categories of gold mutual funds in the way there are for equity or debt funds. However, there are a few different ways gold mutual funds can be structured:

  • Gold ETFs (Exchange Traded Funds): These function similarly to stock ETFs. They hold physical gold bullion, and the price of a unit in the fund directly reflects the price of the underlying gold.
  • Gold Funds of Funds (FoFs): These invest in other gold ETFs or gold mutual funds. This adds an extra layer of management fees but can offer diversification across different underlying gold holdings.
  • Actively managed gold funds: These are managed by fund managers who actively buy and sell gold futures contracts, gold mining company stocks, or a combination of both, aiming to outperform the gold price.

 

Gold mutual funds taxability

 

Gold mutual funds are classified as debt funds for taxation purposes in India. This means:

  • Short-term capital gains (STCG): If you sell your units within 3 years of purchase, the gains are added to your taxable income and taxed according to your income tax slab.
  • Long-term capital gains (LTCG): If you hold your units for more than 3 years, you benefit from a lower tax rate. Gains exceeding Rs. 1 lakh are taxed at 20% with indexation, which adjusts for inflation. This can significantly reduce your tax burden.

 

Additional points to consider:

  • Dividend payouts from gold funds are also taxed as income according to your tax slab.
  • There is no Securities Transaction Tax (STT) applicable when buying or selling units in gold mutual funds.

Remember, tax laws can change, so consulting a financial advisor for the latest information is recommended.

How are gold mutual funds different from gold ETFs?

As an investor, it is essential to recognise the significant differences between gold mutual funds and gold Exchange-Traded Funds (ETFs). Here is what sets them apart:

  • Investment method: Gold ETFs are acquired on stock exchanges much like equities, requiring the registration of a Demat account. In contrast, Gold Funds can be purchased directly from the respective fund house, like various other mutual funds, without the need for a Demat account.
  • Transaction costs: Trading Gold ETFs typically involves no associated fees. Gold Mutual Funds, however, may impose an exit load if you intend to redeem your units during the specified lock-in period.
  • Liquidity: Gold ETFs boast better liquidity due to their listing on stock exchanges. Since they do not impose exit loads, you can buy and sell units at any time during market hours. Gold Mutual fund units, on the other hand, can be redeemed by selling them back to the mutual fund at the current NAV.
  • Pricing: Gold Mutual Fund units and Gold ETFs have distinct pricing mechanisms. Gold Mutual Fund unit prices can be observed through the NAV, reported at the end of the trading day. Conversely, Gold ETFs are traded on stock exchanges, providing real-time price updates.

How to invest in gold funds?

Investing in gold mutual funds is straightforward on the Bajaj Finserv platform:

  1. KYC completion: Ensure your KYC (Know Your Customer) formalities are complete with the fund house.
  2. Choose a fund: Start by selecting a gold mutual fund that aligns with your investment goals and risk tolerance.
  3. Invest: Invest the desired amount in the fund through lump-sum or SIP (Systematic Investment Plan) mode.
  4. Monitor: Keep track of your investments and monitor your fund's performance over time.

Conclusion

Gold mutual funds make it easier for investors to harness the benefits of gold in a convenient, professional, and diversified manner. While investing in gold, as with any investment, carries its own set of risks, these funds can play a valuable role in wealth preservation and portfolio diversification, making them a worthy addition to your investment portfolio.

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Frequently asked questions

What is a gold mutual fund?

Think of it as a shared pot of gold. Gold mutual funds collect money from investors and use it to buy gold bullion, gold securities, or even gold mining company stocks. This lets you own a piece of the gold market without the burden of physical storage.

Is it safe to invest in gold mutual funds?

Generally, gold is considered a safe haven during economic downturns. However, gold prices can fluctuate. Gold mutual funds themselves are well-regulated, but the investment carries inherent market risk.

What is the benefit of a gold SIP?

A Systematic Investment Plan (SIP) lets you invest a fixed amount regularly in a gold mutual fund. This benefits from rupee-cost averaging, potentially smoothing out price fluctuations over time.

Which is better, gold or a gold mutual fund?

Gold mutual funds offer a more convenient and secure way to own gold. You avoid the hassles of storage and security risks. However, physical gold might offer some tax advantages depending on your situation.

How do I choose a gold mutual fund?

Consider your investment goals, risk tolerance, and investment horizon. Look for funds with low expense ratios and a good track record. Consulting a financial advisor can be helpful.

How are gold mutual funds taxed?

Gold mutual funds are taxed as debt funds in India. Short-term gains (within 3 years) are taxed according to your income slab. Long-term gains (over 3 years) benefit from a lower tax rate with indexation.

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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing