Are you looking to diversify your portfolio? Do you seek a hedge against inflation? You may consider putting money in gold funds. It is a fund of funds that invests predominantly in Gold Exchange Traded Funds or Gold ETFs. You have Gold ETFs, in turn investing in physical gold of the highest purity. Experts recommend that you allocate a maximum of 5%-10% of your portfolio towards gold. However, should you start SIP in gold mutual funds?
What are gold mutual funds?
Gold mutual funds are fund of funds (FoFs) that invest mainly in Gold ETFs. Moreover, the Gold ETFs, in turn, track the domestic price of physical gold. You have the net asset value (NAV) of the gold fund, linked to the price of gold in the domestic market.
Gold mutual funds are passive investments whose returns are close to Gold ETFs. You may invest in gold mutual funds through the systematic investment plan or the SIP. It helps you invest fixed amounts periodically in the gold fund of your choice.
Should you start SIP in gold funds?
You have many retail investors investing in gold funds through SIP. It helps you invest small amounts regularly and attain the requisite allocation towards gold in your portfolio.
You can invest as low as Rs 500 per instalment in a gold fund through the systematic investment plan. You get the rupee cost averaging benefit if you invest in gold mutual funds through the SIP.
It helps as you get more fund units when the price of gold falls and lesser units when gold prices rise. You may average out the purchase price of units over time.
You may start SIP in gold funds if you want to invest steadily in gold over some time. Moreover, you don’t need a Demat account to invest in gold funds. It will help if you invest in gold funds through SIP to diversify your portfolio rather than chase returns.
How are gold mutual funds taxed?
You have gold funds taxed similarly to physical gold. The short term capital gains on selling units of the gold fund held for less than 36 months are added to your income and taxed according to the applicable income tax slab. The long term capital gains on selling units of the gold fund held for more than 36 months are taxed at 20% with the indexation benefit.
What are the expenses of investing in gold funds?
Gold funds have a higher expense ratio as compared to Gold ETFs. The fund of funds structure means you incur a double expense ratio. For instance, you incur an expense ratio of the fund of funds and the expense ratio of the underlying Gold ETF. You may also incur an exit load of around 1% when redeeming units of the gold fund within one year from the allotment date.
Factors to consider before investing in gold funds
You may consider comparing the average return of the gold fund against its peers over some time. It would help if you picked the gold fund with a lower expense ratio to increase your take-home return.
Gold funds indirectly track the domestic price of physical gold. You have market demand and supply impacting gold prices. For instance, the value of the gold fund may rise if the domestic price of gold goes up.
You may consider taking a look at the assets under management (AUM) of the asset management company. Opt for an AMC with significant assets under management.
You may invest in gold funds to diversify your portfolio. It is a stable investment that protects your portfolio against inflation and market volatility. However, gold funds have a higher expense ratio as compared to Gold ETFs. In a nutshell, you may invest consistently in gold funds through the SIP to build the necessary allocation towards gold in your portfolio.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
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