Gold Mutual Funds - Types, Purpose, Returns, Risks, How Gold Fund Works

Gold Mutual Funds are one of the popular ways to invest in gold in recent times. Investor no more needs to buy physical gold to grow their assets. They can do it with a digital asset as well. In this article, we will explain the same and also, how you can choose the best mutual fund to invest in 2024.

What is a Gold Fund?

Gold Fund or Gold Mutual Fund is a type of mutual fund that invests in gold reserves, directly or indirectly. These investments are usually made on stocks of gold-producing and distributing syndicates, physical gold, and stocks of mining companies. 

This way of investing in gold is highly convenient as you don’t have to physically purchase the commodity. One can use these funds as a shield to protect themselves from an economic shock. For the same reason, many people diversify their investment portfolio with 10% - 20% of gold fund investment.

Types of Gold Mutual Funds

There are two types of Gold Mutual Funds: Direct Gold mutual funds and Regular Gold mutual funds. The key difference between the two lies in the way they are purchased and the fees charged. 

Direct Gold mutual funds:

 are those gold funds that can be purchased directly from the mutual fund company or online platforms. These funds usually have a low expense ratio because no commission is required to be paid. Hence, the Net Asset Value of these funds may also be slightly higher than the Regular Gold mutual funds. 

Regular Gold mutual funds:

are those that are purchased through brokers or distributors, instead of the company. Due to the commission added now, these funds have a high expense ratio. However, this type of Gold mutual fund requires a low initial investment, making it easy for new investors. 

On the last note, you must consider both the expense ratio and mode of investment when choosing between Regular and Direct Gold mutual funds to be clear about your investment returns. 

Top 10 Gold Mutual Funds in India by Last 5-Year Returns

Below are the gold mutual funds in India based on the last 5 years returns for you to invest in:

Who Should Invest in Gold Funds?

If you are looking forward to diversifying your investment portfolio, and taking an edge against inflation with minimal risk and steady returns, Gold mutual funds could be the choice for you. These are the best low-risk mutual funds that are ideal for investors who do not want to purchase and store physical gold. 

However, just like every other mutual fund, investors must consider their financial situation, risk tolerance, and investment goals before making any purchase. Consider consulting a financial advisor first. 

Difference Between Investing in Physical Gold and Gold Mutual Fund

One can invest in gold through an array of options, including physical gold, gold mutual funds, or gold bonds. However, each of them has its advantages and disadvantages. So, below we have listed some key differences between investing in physical gold, gold mutual funds, and sovereign gold bonds:

How Can You Invest In Gold Mutual Funds?

Investing in Gold mutual funds is easy. First, you must choose whether you want to purchase a regular or direct gold mutual fund. Then, figure out the best gold mutual fund for yourself. You can also choose to invest in short-term mutual funds or find an SIP plan for 10 years as a long-term investment.

Note that it is not mandatory to have a demat or trading account to purchase units of Gold Funds. You can start with a free investment account to invest in Direct Gold mutual funds. However, you need a demat and trading account to invest in Regular Direct mutual funds.

How to Invest in Gold Mutual Funds?

Below are all the steps on ‘How to invest in mutual funds’ that one needs to follow:

1. Visit an investment platform.

2. Enter all the required details.

3. Complete your e-KYC.

4. Invest in your preferred gold mutual fund. 

Frequently Asked Questions (FAQs)

• What are Gold funds?

Gold funds pools investment from different investors and invests that assets further in the gold or gold-related instruments like a gold futures contract, gold bullions, etc. These funds aim to generate returns for the investors by the movement in the prices of the gold.

• What are the advantages of investing in gold funds?

There are many advantages of investing in gold funds which are:

1. High liquidity
2. Diversification
3. Flexible investments
4. Good returns
5. Disciplined investments

• How are gold funds taxed?

Gold funds are taxed the same as the debt funds or the gold jewelry. If an investor redeems the units within 36 months, then it will be taxed short-term capital gains and the gains will be added to income and will be taxed as per the income tax slab rate. If an investor redeems the units after 36 months, then it will be taxed as long-term capital gains which is at the rate of 20% after the benefit of taxation.

• What is the minimum amount to invest in gold funds?

The minimum amount to invest in the gold funds varies from fund to fund. But the lower amount which a fund can have to invest is Rs. 100. 

• How does the price of gold fund change?

The price or the NAV of the gold funds depends on the price of the gold in the economy. If the price of the gold in the economy moves up, then the NAV of the fund will also increase by the same proportion less expense ratio & vice versa.

• Which are the best gold funds?

There are many gold funds and all are best in their own feature. Some of the examples of gold funds are:

1. Axis Gold Funds
2. Kotak gold fund
3. HDFC gold fund
4. SBI gold fund

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