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Gold: A Timeless Investment - How Mutual Funds Make It Easier

06 May 2024 - Tushar
Reading time about 5 minutes

Gold has held a place of allure and value throughout history. As an investment, it offers several advantages, making it a popular choice for many. But what if you don’t want the hassle of storing physical gold? This is where gold mutual funds come in.

Gold Mutual Funds

Why Invest in Gold?

  • Hedge Against Inflation: Gold prices tend to rise alongside inflation, protecting your purchasing power over time.
  • Portfolio Diversification: Adding gold to your portfolio can help mitigate risk by reducing overall volatility.
  • Safe Haven Asset: During economic uncertainties, gold often acts as a safe haven, offering stability when other markets experience turbulence.

##Investing in Gold via Mutual Funds

Gold mutual funds offer a convenient and accessible way to invest in gold without the need for physical storage or dealing with purity concerns. Here’s how they work:

  • Fund Management: You invest in units of the gold mutual fund, which in turn invests in gold ETFs (Exchange Traded Funds) that track the price of gold.
  • No Physical Storage: You don’t need to worry about storing physical gold or its associated security risks.
  • Liquidity: Mutual funds offer high liquidity, allowing you to easily buy and sell your units like any other mutual fund investment.
  • Convenience: Investing through mutual funds is a simple and hassle-free process, often requiring minimal initial investment amounts.

Choosing the Right Gold Mutual Fund

  • Investment Objective: Consider your overall investment goals and risk tolerance.
  • Expense Ratio: Lower expense ratios translate to higher returns for you.
  • Fund Performance: Research the fund’s historical performance and compare it to its peers.
  • Fund Manager Expertise: Choose a fund with a proven track record and a well-regarded fund manager.

Performance of Gold Mutual Funds Over the Last Decade

The table below highlights the returns of regular plan gold funds over the past 10 years, focusing solely on the growth option for easier comparison. Notably, the average annual inflation rate during this period was 5.40%.

Comparing this inflation rate with the returns from gold funds, we see that they consistently outperformed inflation. Driven by recent global uncertainties, gold’s safe-haven status has led to double-digit returns in the past 3 years. This strong performance is also reflected in the 1-year and 3-year returns of gold funds.

Scheme Name 1 Year 3 Years 5 Years 10 Years
Quantum Gold Fund 15.48 13.73 16.78 8.77
LIC MF Gold ETF FOF 16.3 13.62 16.49 8.03
ABSL Gold Fund 15.32 13.55 16.08 7.61
SBI Gold Fund 16.66 14.05 16.71 7.57
HDFC Gold Fund 15.88 13.81 16.53 7.55
Invesco India Gold ETF FOF 15.74 13.71 16.69 7.54
ICICI Pru Gold Savings FOF 15.64 13.66 16.21 7.52
Kotak Gold Fund 15.79 13.3 16.19 7.43
Nippon India Gold Savings 15.79 13.7 16.43 7.28
Axis Gold Fund 15.96 13.87 16.75 7.07
Quantum Gold Savings 16.00 13.89 16.55 -
UTI Gold ETF FOF 15.83 - - -
DSP Gold ETF FOF* - - - -
Tata Gold ETF FOF* - - - -
Category Average 15.87 13.72 16.49 7.64

* DSP Gold Fund and Tata Gold Fund have not yet completed 1 year of their operations. Since launch they have delivered returns of 15.67% and 12.64% respectivly.

Taxation

It’s essential to understand the taxation implications associated with any investments. Capital gains tax applies when you sell your gold mutual fund units for a profit. The tax treatment depends on the holding period of the investment. Here’s an overview of the taxation of gold mutual funds. - Short-term capital gains: If you hold the units for less than three years, the gains are treated as short-term capital gains and taxed at your applicable income tax rate. - Long-term capital gains: If you hold the units for three years or more, the gains are treated as long-term capital gains. As of the current tax laws, long-term capital gains on equity-oriented mutual funds, including gold mutual funds, are taxed at a flat rate of 10% without indexation benefit, if the gains exceed ₹1 lakh in a financial year.

It’s important to note that tax laws and rates may vary from year to year and are subject to change based on government regulations. Therefore, investors are advised to consult with a tax advisor or financial planner to understand the latest tax implications and optimize their investment strategies accordingly.

Remember:

  • Gold prices can be volatile, so don’t expect consistent, high returns.
  • Consider gold as a long-term investment to benefit from its potential for capital appreciation over time.
  • Gold doesn’t generate regular income like stocks or bonds.

Investing in gold via mutual funds can be a smart way to add a touch of stability and diversification to your portfolio. By understanding the benefits and choosing the right fund, you can leverage the timeless value of gold in your investment journey.

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