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Gold Funds are a convenient way to invest in gold as an asset class without having to hold the commodity in a physical form. However, there are some limitations associated with the fund.

This article covers the following:

  1. How do Gold Funds work?
  2. How Gold Funds are different from Gold ETFs?
  3. Things to consider as an investor
  4. How to Invest in Gold Funds?
  5. Top 5 Gold Funds in India

 

1. How do Gold Funds work?

A gold fund is an open-ended fund which invests in units of a gold Exchange Traded Fund (ETF). The basic aim of the fund is to create wealth by tapping the potential of gold as a commodity. It is suitable for investors who have a desire to take exposure to gold. It is convenient to invest in gold via gold funds instead of holding the commodity in a physical manner.

You may enjoy the similar benefit of holding gold physically along with professional fund management. Each gold fund would have a fund manager who would take investment bets as per objective of the fund. The returns of gold fund may closely correspond to that of gold ETF. Additionally, the Net Asset Value (NAV) of the fund may be influenced by overall price movement of gold in the market.  

2. How Gold Funds are different from Gold ETFs?

As an investor, you need to know the significant differences between gold etfs and gold funds.

  • Pricing

    Units of gold funds are priced differently as compared to gold ETFs. You may see price of gold fund units by way of NAV which is disclosed at the end of the trading session. However, as gold ETFs are listed on the stock exchange, you can get real-time updates about their price.

  • Investment mode

    Just like equity shares, you can purchase units of gold ETFs from stock exchange. However, you need to open a Demat Account to invest in them. Similar to other mutual funds, units of gold funds can be bought from the respective fund house without requiring the need of a Demat Account.

  • Systematic investment plan (SIP)

    You can invest in gold funds by means of SIPs. However, gold ETFs do not entertain SIPs.

  • Minimum amount of investment

    Owning one unit of gold ETF is equal to owning 1 gram of gold. Thus, minimum investment amount in gold ETF depends on the prevailing price of gold in the market. As regards gold funds, you can start SIP of a nominal amount of as low as Rs 1,000.

  • Transaction cost

    There are no transaction costs, in particular, while investing in gold ETFs. However, gold funds may charge an exit load if you redeem your investment within the said lock-in period.

  • Expense ratio

    The expenditure involved in managing gold funds is more than gold ETFs. As gold funds invest in gold ETFs, so the expense ratio of the former would include expenses of the latter.

  • Liquidity

    On account of being listed in the exchange, gold ETFs offer higher liquidity than gold funds. As the former do not charge any exit loads, you can buy/sell the units at any time during the market hours. Units of gold funds can be redeemed by selling them back to the fund house based on the NAV for the day.

3. Things to consider as an investor

  • Lower returns

    Unlike equities, gold may not be able to give you exceptionally high returns. Basically during a market crisis, the investment in gold is driven by the need for a safer haven. As soon as the investor regains confidence, he might switch over to riskier options like stocks and bonds. Thus, gold may not be considered as a long-term option for wealth creation.

  • Seasonal behaviour

    Gold shows a very seasonal behaviour as far as performance is concerned. It gives relatively higher returns only during periods of insecurity in the market. At all other times, you may find it lagging behind other asset classes. In such a scenario, gold can perceived more like an insurance cover rather than an investment opportunity.

  • Diversification issues

    Many a times investors are asked to diversify into gold to spread the overall risk of the portfolio. But gold may not be an ideal asset class for portfolio diversification especially for investors holding small to medium-sized portfolios. It is because of the low optimum return generating capacity of gold as compared to other asset class. However, for large-sized portfolios, a smaller amount may be allocated towards gold to as a risk cover without having adverse impact on the overall goal accomplishment.

  • Dynamic portfolio allocation

    Gold is not that bad of an asset. You may still consider allocating some portion of your portfolio. The only thing about it is to be tactical. During a depression in the market, you may think of a greater portfolio allocation into gold. Conversely, as the market recovers, try shifting your allocations to better asset classes. A dynamic approach could help you in reaping the benefits of investing in gold.

4. How to Invest in Gold Funds?

Investing in Gold Funds is made paperless and hassle-free at ClearTax.

Using the following steps, you can start your investment journey:
Step 1: Sign in at cleartax.in
Step 2: Enter your personal details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favourite gold fund from amongst the hand-picked mutual funds

5. Top 5 Gold Funds in India

While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best gold funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.

The following table represents the top 5 gold funds in India based on the past 1 year returns. Investors may choose the funds based on a different investment horizon like 5 years or 10 years returns. You may include other criteria like financial ratios as well.

Fund Name
ICICI Prudential Gold Savings Fund
Axis Gold Fund
Aditya Birla Sun Life Gold Fund
Kotak Gold Fund
SBI Gold Fund

*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.

If you had invested Rs 10,000
every month for last 25 years
in equity funds, you could make

₹ 3.3 Crores
at 15%* annual returns

Invested
Rs 30 Lakhs

Received
Rs 3.3 Crores

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