Gold Funds

Vaibhav Shah
Vaibhav Shah
vaibhavs@orowealth.com
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What are Gold Funds?

Gold Funds are a type of Exchange Traded Funds or Mutual Funds. Such funds allow investors to invest in companies that are producing gold or in various gold bullion. The goal of such funds is to obtain high returns from investing in Gold in a simpler way.

How Do Gold Funds Work?

A Gold Fund involves the collection of money from a large group of investors. The collected money is utilized to purchase gold. Or, the money is invested in the shares related to gold mining. After the investment, the investors receive their “units”. Each fund includes an equal value in one unit. However, the value of that unit depends on the gold value of that time or the share prices available. The gold value is known and represented as NAV or Net Asset Value.

It is important for an investor to understand NAV’s concept. The NAV presents the per unit value of the fund’s market position.

For example, suppose a fund of gold has a total worth of Rs. 10 Crore. And the total units issued are 1- lakh. In that case, the total NAV of this fund will be about Rs. 100.

So, if an investor is holding 20 units of that Gold Fund, he or she be having a worth of Rs. 2,000.

Due to the changing price of gold, the NAV value is updated on a daily basis. But if you invest in the shares of gold, it gets updated on an intra-day level. Which is why you buy at the closing price of the previous day.

 

Types of Gold Funds

There are different types of gold funds to invest in:

1. Gold Mining Funds

As the name suggests, these funds include investment in mining companies that mine gold. The performance of the companies decides the value of the shares, hence, the value of the fund returns. If the equity market seems to have fluctuations, investors find gold funds much more stable. The prices of gold in the market also depend on the difference between the supply and demand.

2. Gold ETF or Gold Exchange Traded Funds

These funds invest in the pure form of gold, bought only from banks, which are RBI approved. Fund managers monitor the daily ups and downs of the gold prices and take care of the physical gold trading. The ETF’s units are sold in the exchange market, allowing a huge liquidity for sellers as well as the buyers.

3. Gold FoF or Gold Fund of Fund

Gold FoFs are invested in schemes of mutual funds, which include assets of Gold ETFs. These types are easier to invest and require no Demat account. These funds don’t invest directly in the pure physical gold. However, they get an indirect benefit from the same assets as gold ETFs.

Key features of Gold Fund Types

Gold mining funds are easy to differentiate from the other two types. But people get confused between the Gold FoFs and Gold ETFs mostly. Both kinds are handled by big houses of mutual fund providers. Market experts design the fund schemes to help investors with their gold investment.

Here are key features to differentiate between Gold ETFs and Gold FoFs:

1. Pricing

The international prices of gold drive the prices of Gold ETs. Hence, they are priced in a transparent manner. In the case of Gold FoFs, the fund can include gold and other associated assets as well. Hence, the NAV of Gold FoFs is decided by the current value of those assets.

2. Method of Investment

To invest in Gold ETFs, one has to conduct a purchase via the stock exchange, which requires the creation of Demat Account. On the other hand, Gold FoFs are available at mutual fund providing companies. Plus, the investor doesn’t have to generate his or her Demat account for the investment.

3. Availability of SIP

Gold ETFs don’t provide the availability of SIP of Systematic Investment Plan. This feature is available only if you invest in Gold FoF. Hence, Gold FoF become approachable for all kinds of investors, no matter how small their investment capacity is.

4. Minimum Amount Limitation

In Gold ETFs, the investors are required to purchase at least around 1 gm of gold. The price depends on the current market rate. On the other hand, Gold FoFs require only a monthly SIP of INR 1000 to begin the investments.

5. Cost of transaction

There are no exit or entry loads when you are investing directly in Gold ETFs. However, Gold FoFs can have about 1 year of exit loads.

6. Required Management Expenses

The management expenses are a little higher in Gold FoFs as compared to Gold ETFs. In the case of Gold FoFs, the funds receive expenses of ETFs as well as the management expenses of running the fund.

7. Extent of Liquidity

Gold ETFs are free from all constraints and provide liquidity, as they are sold and bought directly in the stock market. On the other hand, Gold FoFs depend on the features of mutual funds you select.

Hence, both types of investments have their unique features, which you can utilize as per your financial goals.

Benefits of Investing in Gold Mutual Funds

1. Easy Gold Investment

A Gold Fund from a reliable mutual fund provider offers a safe exposure to the asset of gold. No matter how small or big your investment goals are, a perfectly sized fund waits out there for you.

2. No Need for a Demat Account

Unlike the Gold ETFs, the Gold mutual funds stay open for all investors without a need for Demat Account. The Demat Account is required when you are directly dealing with the stock exchange. But the mutual funds of Gold save you from that hassle.

3. Gold Benefits without Maintaining Physical Gold

Gold Fund saves investors from the collection and maintenance of actual gold. You can obtain all the value benefits of gold without having tangible gold.

4. Investment Diversification

Adding gold funds in your investment portfolio is a great way of diversification. You can balance your long-term and short-term investments with gold SIP fund schemes.

5. Protection from Economic Fluctuations

When the market is facing economic fluctuations, gold funds have the capacity to protect your financial stage. The falling currency issue is countered by the gold value, which is a great way to safeguard your investments. You can balance your equity investments with gold mutual funds.

6. Invest as Per Your Purpose

Gold mutual funds provide you with a chance to invest for growth and dividends as well. You can choose a purpose and find a reliable fund provider in the market. The purpose-oriented funds of gold are a great help for an Indian investor due to the economic fluctuations.

7. Ability to Start Small

With gold mutual funds, you can begin investing with a tiny amount and gradually increase. The minimal monthly SIP for these funds is INR 1000 generally. You can choose the minimal amount or a higher amount as per your investment goals and portfolio.

Top Gold Funds to Invest in India

• Birla SL Gold Fund
• Axis Gold Fund
• HDFC Gold Fund
• Canara Robeco Gold Savings Fund
• ICICI Pru Regular Gold Savings Fund
• Invesco India Fold Fund
• IDBI Gold Fund
• Quantum Gold Saving Fund
• Kotak Gold Fund
• SBI Gold Fund
• Reliance Gold Savings Fund

Performance of Gold Funds in India

This investment category has always been popular due to the demand for Gold in Indian culture and the availability of multiple investment options. Gold funds offer multiple investment opportunities such as physical gold investment, Electronic Gold and other investment types. Top Gold funds have shown a strong growth in NAV in the last five years.

How to Invest in Gold Funds?

Investing in a Gold Fund is simple. You just follow the same rules as your mutual fund investments. Simply, find a top-performing fund that aligns with your purpose and chooses a SIP according to your monthly financial convenience. You can do it all online nowadays.

Tax on Gold Funds

The gold funds come within the Tax laws of Debt. Capital gains under short terms are taxed as per the income tax slab. You are required to pay 10% or 20 % of your capital gains, depending on which tax bracket you come under. Capital gains under long-term provide a chance to gain indexation benefits along with a fixed 20% rate of taxation. Hence, you can pay tax after modifying the inflation.

Also, the dividends are also taxed if you receive them from your funds. The rate for dividends is 25% along with around 4% of cess rate. Hence, the total DDT becomes about 29.12% for all kinds of debt funds, which includes Gold funds as well.

Hopefully, you have become familiar with all concepts related to Gold Fund investment.

Vaibhav Shah
Vaibhav Shah
vaibhavs@orowealth.com

Vaibhav has a strong work experience with the likes of Edelweiss Financial Services and L&T Limited. He is a Chartered Accountant (All India Rank: 36) and Chartered Financial Analyst (CFA Institute, USA) and working as a VP Research at Orowealth.

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