A guide to gold mutual funds

Indians have had a penchant for gold since time immemorial. Buying gold on any celebratory occasion is a ritual that Indians have adhered to religiously for generations. As an asset class, too, gold has been a favourite among Indian investors.

As per data published by Statista, India was the country with the highest demand for gold jewellery in the world. Further, around 22,000 tonnes of Gold is estimated to be possessed by Indian households, valued at more than $1 trillion. According to a report published by the World Gold Council in Jan 2023, rural India is the largest consumer of gold jewellery and the middle class is the primary gold consumer.

However, investing heavily in physical gold can pose unique challenges. While buying gold has undeniable benefits, it should not have a significantly high weightage in your portfolio. In the long run, gold loses value on resale. In addition, when you resell gold, you cannot recover the making charges of gold jewellery, which can go up to 25% of the cost of gold and the GST levied. Storing large quantities of gold can also be challenging due to security risks.

Gold mutual funds can be a convenient alternative to invest in the asset without having to buy physical gold or gold jewellery. Gold funds are mutual funds that primarily invest in either gold exchange-traded funds (ETFs) or shares of companies involved in mining, refining, distribution, or marketing of gold or gold products. The underlying asset in gold funds is physical gold; thus, any movement in the price of physical gold affects the value of gold funds.

Gold mutual funds are open-ended funds, and the investments are made in the units of a gold ETF. Investors can invest via SIPs or the lumpsum route. The returns of gold mutual funds are usually aligned with the underlying gold ETF, and the fund's net asset value can be directly impacted by the price trends of gold in the market.

Advantages of investing in gold mutual funds:

Gold funds are a prudent investment choice for investors with low-risk appetites looking to diversify their portfolio. SEBI regulates gold mutual funds, and more importantly, they are backed by the assurance of the purity of gold (99.5% purity). These factors make gold funds an excellent investment option for conservative investors.

Your portfolio can get exposure to gold as an asset class with an investment amount of as little as Rs 1,000. Unlike buying physical gold or gold jewellery, where you may have to shell out a large sum at once, gold mutual funds allow you to conveniently invest in gold without waiting to amass a sizable sum.

Gold mutual funds can help you diversify your portfolio beyond equity and debt instruments. This is because, as an asset class, gold bears little correlation with the stock market, and the performance trends of gold and equity typically do not exhibit similarities. This provides a sufficient hedge to your portfolio because gold will likely show upward trends if the stock markets are performing poorly. This creates a balance in your portfolio because gold mutual funds or ETFs can act as shock absorbers in your portfolio.

Unlike physical gold, gold mutual funds do not pose liquidity challenges. You can purchase any amount of funds at your convenience and liquidate those at short notice without too much trouble. Trading these funds is akin to selling any other mutual fund, and you will receive the capital in a few business days after the funds have been liquidated. This offers investors way more flexibility than selling off physical gold and gold jewellery. What's more, you do not need to worry about storage and security risks arising from the possibility of theft or loss.

An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund

All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link : https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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