What Are Gold Funds And Who Should Invest In It?

How do Gold Funds work?

1. The fund manager gathers funds from various sources and combines them into one investment fund.
2. The fund manager uses the collected funds to purchase actual gold or to make investments in financial instruments that are closely tied to gold, such as gold futures or gold mining stocks.
3. Based on the price of gold, the gold fund's value varies. The value of the fund increases with an increase in the price of gold and decreases with a decrease in the price of gold.
4. Investors can purchase and sell shares of the gold funds on an exchange, much like they would with stocks.. The current value of the underlying gold investments determines the share price.
5. For administering the fund and purchasing and selling gold investments, investors often pay fees to the fund manager.

Taxability of Gold Funds in India

How Gold Funds are different from Gold ETFs?

1. Investment method: Gold funds are actively managed mutual funds that invest in various forms of gold such as physical gold, gold-related securities like mining stocks and bonds of companies engaged in gold-related businesses. On the other hand, gold ETFs are passive investment vehicles that track the price of gold and invest primarily in physical gold bullion.
2. Expense ratio: Gold funds generally have a higher expense ratio compared to gold ETFs, as they are actively managed by a fund manager, which incurs additional costs. The expense ratio for Gold ETFs is comparatively lower as they are passively managed and have fewer operational costs.
3. Minimum investment: Gold funds typically have a higher minimum investment amount than Gold ETFs. While Gold funds may require a minimum investment of Rs. 1,000 or more, Gold ETFs can be purchased in smaller quantities.
4. Liquidity: Gold ETFs are traded on stock exchanges like shares, making them more liquid and tradable than Gold funds, which can be bought and sold only at the end of the trading day at the NAV (Net Asset Value).
5. Taxation: Both Gold funds and Gold ETFs are taxed similarly in India. Short-term capital gains (STCG) tax is applicable if the units are held for less than 36 months, and long-term capital gains (LTCG) tax is applicable if the units are held for more than 36 months. However, Gold ETFs have a slight advantage in terms of taxation as they are treated as equity funds for tax purposes.

Who should invest in Gold Funds?

1. Diversification seekers: Investors who want to diversify their investment portfolio beyond traditional equity and debt instruments can consider investing in gold funds. Gold has historically acted as a safe haven asset and can help reduce the overall risk of the portfolio.
2. Inflation hedgers: Investors who are concerned about the impact of inflation on their investments may consider investing in gold funds. Gold has historically provided a hedge against inflation and can help preserve the purchasing power of the investment.
3. Long-term investors: Investors who have a long-term investment horizon and are looking to accumulate wealth over time can consider investing in gold funds. Gold has historically delivered good returns over the long term and can help investors achieve their financial goals.
4. Short-term investors: Investors who are looking to take advantage of short-term price movements in gold can consider investing in gold funds. Gold prices are influenced by a variety of factors, including global economic conditions, geopolitical tensions, and currency movements, and can be volatile in the short term.

Advantages of investing in gold funds

1. Diversification: An investor's portfolio can be diversified with the help of gold funds. Since gold frequently has a low correlation with other assets like equities and bonds, it may do well during market downturns when other assets are losing value.
2. Professional Management: Gold funds in India are managed by professional fund managers who are responsible for making investment decisions on behalf of their clients. These fund managers analyze market trends, economic conditions, and other factors that may affect the price of gold. They also have to consider the fund's investment objective, risk tolerance, and investment horizon when making investment decisions.
3. Safe haven asset: Since gold is frequently regarded as a safe haven asset, it can offer investors protection when the economy is unclear or the markets are volatile.
4. Liquidity: Gold funds have many buyers and sellers ready to make a transaction. This makes it easy for investors to get access to their money when they need it.
5. Accessibility: A wide range of investors, from individuals with little amounts of capital to institutional investors, can access gold funds.

Risks associated with Gold Fund

1. Market risk- Several variables, including economic conditions, geopolitical developments, and shifts in supply and demand, can cause fluctuations in Gold prices. As a result, investors may suffer losses and the value of gold funds may change.
2. Inflation risk- Because gold's price tends to increase as currency values decline, it is frequently regarded as a hedge against inflation but over a longer period of time.
3. Management risk- The decisions made by the fund managers of gold funds affect their performance. These managers may make mistakes or be biased, which can result in underperformance. The fees that fund managers charge can also reduce returns.
4. Counterparty risk- Some funds that invest in gold do so through futures contracts, which are arrangements to buy or sell gold at a later time. The fund could experience losses if the counterparty to a futures deal defaults or is unable to deliver the gold when it is a physical gold deal.

Conclusion