Gold funds are one of the newest ways to invest in gold as an asset without the necessity to hold the commodity in its physical form. They are basically a type of mutual funds and can be categorised as open-ended investments, based on the units provided by the gold Exchange Traded Fund. These funds can also be used as a hedge to protect an investor against economic shocks. Many individuals diversify their investment portfolio with a part going into gold funds to secure themselves from the fluctuating market.
Is it worth investing in gold funds?
The primary aim of putting money into gold funds is to generate wealth during the investment tenure and create a cushion against market fluctuation. The return of the best gold funds can sometimes outgrow the actual price of the precious metal itself – a lucrative opportunity for investors. If an investor opts for long-term gold mutual funds, the returns received will be calculated based on the current market's gold prices. It can offer a significant return if the price of gold increases at the time of redemption.
Gold funds are taxed similarly as gold jewellery and depend on investment duration. If the tenure is less than three years, it is considered a short-term investment. The revenue is added to the investor's gross income to calculate tax. For the long-term investment of more than three years, gold funds are taxed at 20%.
Who should invest?
Gold funds are ideal for diversifying portfolios and lowering the risk of investment. It is regulated by market regulator Securities and Exchange Board of India (SEBI), which lowers the risk associated with investing in a mutual fund. Gold funds are insulated from financial market fluctuations, thus are relatively stable and attractive to conservative investors.
A major drawback of these funds is they offer lower returns when compared to equities. Thus, gold may not be a long-term option for wealth creation for a lot of investors. It gives relatively higher returns only during periods of market collapse.