Investments in Gold have been popular since a very long time. Besides physical gold and E-Gold, Gold Mutual Funds are introduced as a medium through which an investor can invest in gold as an asset class and not hold it in the tangible form.
What are Gold Mutual Funds?
Gold Mutual Fund is an open-ended scheme which invests the assets in gold-producing companies or in gold bullions and units of a Gold Exchange Traded Fund (ETF). Gold is one of the most important asset classes because of its ability to grow with inflation and counter to economic crises. It acts as a protection for investment portfolios against volatility.
Let us know more about the best gold mutual funds available in the market, who should invest in gold funds and what are the benefits which can be expected with investments in such schemes:
Best Gold Mutual Funds
Here is a list of Best Gold Mutual Funds in 2020 along with their 5 year trailing returns:
| Fund Name | AUM (Crores) | 3-Year Returns | 5-Year Returns |
| SBI Gold Fund | Rs. 434 | 15.41% | 10.23% |
| Kotak Gold Fund | Rs. 244 | 14.93% | 9.77% |
| HDFC Gold Fund | Rs. 329 | 14.09% | 9.72% |
| Aditya Birla SL Gold Fund | Rs. 89 | 13.58% | 9.63% |
| Nippon India Gold Savings Fund | Rs. 823 | 13.44% | 9.46% |
| Axis Gold Fund | Rs. 67 | 13.43% | 8.89% |
| Quantum Gold Savings Fund | Rs. 22 | 13.42% | 9.22% |
| Invesco India Gold Fund | Rs. 18 | 13.25% | 8.86% |
| ICICI Prudential Regular Gold Savings Fund | Rs. 103 | 13.09% | 9.54% |
| IDBI Gold Fund | Rs. 35 | 13.00% | 8.74% |
(The funds in the table are arranged in descending order according to their 3 year returns. Data as on 2-04-2020; Source- Value Research)
Difference between Gold ETF and Gold Mutual Funds
Often confused with each other, Gold Mutual Funds and Gold ETFs are two different ways to invest in Gold. Here are some points which can help you distinguish between the two:
- Understanding the meaning:
Gold Mutual Funds are mutual funds/schemes which invest in gold-producing or gold-mining companies and gold exchange-traded funds (ETFs).
However, Gold ETFs are funds that invest a minimum 90% of the assets into physical gold of 99.5% purity and 0 to 10% in debt instruments.
- Price of Gold MF and Gold ETF:
Gold mutual fund units and Gold ETFs are priced differently. You can check the price of gold fund units from the respective Net-Asset Value (NAV) of the fund. But, since gold ETFs are listed on the stock exchange, you can check and seek real-time updates about their respective prices.
- Liquidity
Gold ETFs are listed on stock exchange; hence, can be bought or sold anytime during market hours. What’s more, one can convert them into physical gold provided they have 1 Kg of gold in their account or limit set by your fund house. On the other hand, you can redeem the units of gold mutual funds by selling them back to the fund house on the NAV of the day. Gold Mutual Funds also charge an exit load which is otherwise not applicable in case of Gold ETFs. Hence, Gold ETFs are more liquid than gold funds.
- Costs Involved:
No exit load is applicable in case of Gold ETFs but Gold Mutual Funds may charge an exit load while redemption of the units within the lock-in period. Moreover, the expense ratio for Gold Mutual funds is higher than that of Gold ETFs.
- Demat Account:
You can purchase units of gold ETFs from the stock exchange only after you have opened your demat account. Units of Gold mutual funds can be bought from the respective fund houses without the requirement of a demat account.
Things to be considered before investing
Here are some very important factors which must be considered before starting investments in Gold mutual funds:
- Risk Involved: Any investment will involve some amount of risk. Gold Mutual Funds are moderately risky investment options. In India, the performance of gold as an asset class has fluctuated since 2008, only until last year it gave better returns than equity. Investments in gold mutual funds are backed by real time gold prices which are further influenced by current market scenarios. Hence, these mutual fund schemes may or may not give favourable returns at some point of time.
- Returns: As far as the performance is concerned, Gold is observed to have seasonal responses. It gives higher returns during market instabilities and inflation. This is because during bearish market conditions, investors tend to seek a safe shed for their funds and thereby invest in gold. It is treated more like a safe alternative than an actual investment opportunity.
- Taxation: Gold Mutual Funds have no tax benefits to offer to its investors. Taxes on long-term capital gains (LTCG) are taxable at 10% whereas short-term capital gains (STCG) are taxable according to the applicable slab rates to investors.
- Diversification: Investors are often suggested to diversify their portfolio into gold in order to spread the overall risk. However, it may not be an ideal asset for diversification for all types of investors. It can be of great help for the investors with large-size portfolios and they can put a small amount into gold to protect the portfolio against volatility without affecting the investment objective. But, for small to medium-sized investors, gold may fail to provide necessary benefits because of its low-return generating capacity.
- Employ a Dynamic Approach: If you are going to invest in gold mutual funds or use it as a diversification tool, you must use a dynamic approach which does not harm your investment objective. Basically, investors must dynamically strategize their gold investment for optimum benefits. You should invest highly in gold only when the market is unstable. As soon as the market regains confidence, you must shift your allocations into other asset classes which are better than gold.
Benefits of Investing in Gold Mutual Funds
Here are some of the benefits of investing in Gold Mutual Funds-
- Easy and Convenient access to gold through Gold Mutual Funds without having to hold it in the physical form
- Gold mutual funds protect the portfolio from market volatility because of their ability to act as a hedge against inflation and market instabilities
- Investments can be done with a minimum amount of Rs.1000 (via SIP) without the requirement of a demat account
- These funds can be used to bring diversification in the portfolio thereby spreading the overall risk
Who should invest in Gold Mutual Funds?
- Investors who are willing to invest in gold as an asset class
- Gold mutual funds are not entirely safe for investors. As an asset class, gold has given unfavourable returns over years. Due to frequent fluctuations in the gold prices, the funds are placed at moderate market risks. Hence, investors who are willing to take risks should invest in these mutual funds
- There are no tax benefits associated with gold funds. Individuals who are not seeking investment options with tax benefits, but an emergency fund can choose to invest in gold related schemes
How to Invest in these Mutual Funds?
The investment procedure for Gold mutual funds is the same as that of any other Mutual Fund. There are different methods through which one can invest in gold funds:
- Offline mode – Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal – If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
Frequently Asked Questions
Q.1: What is a Gold Mutual Fund?
Ans: An open-ended mutual fund scheme which invests majority of the assets in gold-producing companies or in gold bullions and units of a Gold Exchange Traded Fund (ETF) is called a Gold Mutual Fund.
Q.2: Which gold mutual fund is best?
Ans: There are many gold mutual funds introduced by different asset management companies. Here are the top 5 gold mutual funds according to 5 year returns:
- SBI Gold Fund
- Kotak Gold Fund
- HDFC Gold Fund
- Aditya Birla Sun Life Gold Fund
- Nippon India Gold Savings Fund
Q.3: How do I invest in Gold mutual funds?
Ans: You can invest in Gold mutual funds just like any other mutual fund. You just have to buy units from the respective fund house. Also, there is no need of having a demat account to invest in Gold Mutual Funds which is otherwise required if you invest in Gold ETFs.
Q.4: Do I need a demat account to invest in Gold Mutual Funds?
Ans: No, you do not need a demat account to invest in Gold Mutual Funds. However, it is compulsory to have this account if you want to invest in Gold ETFs.