You can invest in several Mutual Funds (MFs) based on your goals, preferred horizon, and risk appetite. If you want to invest in gold, you can consider gold mutual funds. These are a great alternative to purchasing the asset in its physical form.

What are Gold Mutual Funds?

A gold MF is a type of fund that invests in gold directly or indirectly. These funds primarily invest in Gold Exchange-Traded Funds (Gold ETFs) or stocks of companies engaged in refining, mining or marketing of gold and its products. 

 

The value of the investment directly depends upon the price of physical gold since it is the underlying asset. This type of mutual fund primarily aims to create wealth throughout the investment period. It also acts as a hedge against uncertain market conditions and helps diversify your portfolio.

Types of Gold Mutual Funds

Now that you know what are gold mutual funds, here are the various types of these funds.

  • Gold Exchange Traded Funds 

Gold ETFs are funds in which the underlying asset is physical gold. Therefore, the value of these funds depends upon the metal’s current price. They are an ideal alternative to investing in gold via its physical form. 

  • Gold Mining Funds

Gold mining funds are another type of gold MF that does not invest in gold physically. Instead, these funds invest in gold mining companies. The gold fund returns directly depend on the companies' performance in gold mining.

  • Gold Fund of Fund

This is a scheme where the funds get invested in the units of Gold ETFs. Also, you do not need to open a Demat account to invest in the units of these funds.  

 

How Do Gold Mutual Funds Work?

Gold mutual funds in India work similarly to Gold Fund of Funds. The fund manager will invest in the units of gold exchange-traded funds, which invest in physical gold. 

 

Then, it allocates the units according to your investment proportion in the scheme. Note that since physical gold is the underlying asset, the value of the units depends on the gold’s price.

Pros of Investing in Gold Mutual Funds

Check out some advantages of investing in gold mutual funds. 

  • Higher Liquidity

A significant benefit of this investment avenue is higher liquidity. If you need funds urgently, you can easily liquidate your gold mutual funds investment on short notice on all business days. 

  • Safe Investment Option

These funds are generally considered a safe option since they are SEBI-regulated. Also, you do not need to worry about the gold’s purity since you invest in units of gold funds. The responsibility lies with the fund house.

  • Hedge Against Inflation

Adding gold mutual funds to your portfolio can be beneficial since gold prices are not related to company stocks and generally move in the opposite direction of other options. As such, when other investments are not performing positively, these funds help minimise the market risk.

Cons of Investing in Gold Mutual Funds

Like every investment, gold mutual funds also have some disadvantages. One of the most significant drawbacks you need to consider is that the returns are fluctuating and not always excellent. In fact, you will generally see exceptional returns in a bearish market. 

 

In addition to this, the costs associated may be higher than gold ETFs. However, the overall costs of investing in gold through a fund are comparatively lower than physical gold.

Things to Consider Before Investing in Gold Mutual Funds

Investing is an important decision that demands caution. You must consider some essential points while investing in gold mutual funds.

  • Tax Implications

The taxation of gold mutual funds depends on the holding period. When you redeem funds within 3 years, the returns are Short-term Capital Gains (STCG). These gains are taxable according to the tax slab you fall under. However, if the redemption is after the 3-year mark, they are Long-term Capital Gains (LTCG) and taxable at 20%.

  • Seasonal Returns

The performance of gold depicts seasonal patterns. This means it earns high returns during market crises. You can understand these seasonal patterns by monitoring gold’s historical performance.

  • Asset Allocation

The right fund allocation is essential to earn good returns from gold. During a market depression, you must increase investments to get higher returns. Similarly, you must shift these investments to other assets once the market recovers.

 

Who Should Invest in Gold Mutual Funds

Gold mutual funds are suitable for conservative investors who want a safe investment offering steady returns. With these funds, you can invest in gold without purchasing the asset physically. They are an affordable option since you can also invest via SIPs. 

 

This also makes them a safe option as you can invest small amounts instead of the hefty amounts of buying physical gold. These funds also help in portfolio diversification since their value remains unchanged during an economic crisis.

 

If you plan on investing in gold mutual funds, you can seamlessly invest via Bajaj Markets. This platform offers various options in a single place. You can invest via a simple process and minimal documentation, making the whole process hassle-free.

FAQs on Gold Mutual Funds

How can I invest in gold mutual funds?

You can easily invest in gold mutual funds online or offline via a mutual fund distributor. You can also invest via a Systematic Investment Plan (SIP).

What is the ideal investment allocation to gold in an investment portfolio?

Assuming moderately high risk, you must consider allocating 10-15% of your investment portfolio to gold. You can do this via a gold MF, ETF, or even physical gold.

Is investing in gold mutual funds safe?

Yes, investing in gold mutual funds is safe since you get positive returns, especially in bearish markets. It also appreciates and resists fluctuating market conditions.

What are gold Exchange Traded Funds (ETFs)?

Gold ETFs are funds that make direct investments in gold. Their investment goal is to generate returns in line with the gold prices.

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