Gold funds are one of the newest ways to invest in gold as an asset class without having to hold it in the physical form. However, there are some limitations associated with the fund. We have covered the following in this article:
1.How do Gold Funds work?
Gold funds are open-ended funds which invest in units of a Gold Exchange Traded Fund (ETF)
. The primary aim of gold funds is to create wealth by making use of 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 sensibly.
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 the objective of the fund. The returns of a gold fund may closely correspond to that of gold ETF. Additionally, the Net Asset Value
(NAV) of the fund may be influenced by the 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. They differ in the following ways:
- Pricing: Units of gold funds are priced differently as compared to gold ETFs. You may see the price of gold fund units by way of NAV, which is disclosed at the end of the trading hours. 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 the stock exchange. However, you need to open a Demat account to invest in these funds. 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.
- SIPs: You can invest in gold funds through SIPs. However, gold ETFs do not entertain SIPs.
- The Minimum Investment Amount: Owning one unit of gold ETF is equal to owning 1 gram of gold. Thus, the 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 want to redeem your units within the predefined lock-in period.
- Expense Ratio: The expenditure involved in managing gold funds is more than gold ETFs. As gold funds invest in gold ETFs, hence, the expense ratio of the former would include expenses of the latter.
- Liquidity: On account of being listed on stock exchanges, gold ETFs offer higher liquidity than gold funds. As the former does 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 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 a long-term option for wealth creation
- Seasonal Behaviour: Gold is prone to having seasonal response 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 perceive more like an insurance cover rather than an investment opportunity
- Diversification Issues: Sometimes, investors are asked to diversify into gold to spread the overall risk of the portfolio. However, gold may not be an ideal asset class for portfolio diversification, particularly 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 as a risk cover without harming the overall goal accomplishment
- Dynamic Portfolio Allocation: Gold is not a bad asset class. You may consider allocating some portion of your portfolio towards it. However, the only thing about it is to be tactical. During a market depression, you may think of a higher portfolio allocation towards 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 all the requested details
Step 3: Complete your e-KYC, it takes no longer than 5 minutes
Step 4: Invest in your most preferred gold fund amongst the hand-picked ones
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, it would be best if you keep your financial goals, risk appetite and investment horizon in mind.
The following table shows the top five gold funds in India based on the past three year returns. You can choose the funds based on different investment horizons like five or ten years returns. You may include other criteria like financial ratios as well.
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.