Gold mutual funds invest directly or indirectly in gold reserves. The investments are focused on gold and its related instruments, including coins, bullion, stocks of gold mining companies, and gold ETFs. These are incredibly popular due to their high liquidity, minimal transaction costs, and tax advantages. These funds are linked closely to gold's market price, making them a great option for several investors.

How do Gold Funds Work?

A gold fund works by gathering money from several people to invest in gold-related assets. The value of these funds can fluctuate depending on the gold price, which allows people to get exposure to precious metals without storing or buying physical gold. These funds are easy to buy or sell at the current market price, so investors benefit from their liquidity. Gold mutual funds also come with low transaction costs. They can also be a hedge against inflation, where investors can benefit from the gold market’s price appreciation.

Purpose of Gold Mutual Funds for an Investor

One of the primary purposes of gold funds is to create wealth and form a cushion against a downturned market. The performance of a gold fund varies depending on its different prices. Even a minor change in the global market price of gold can impact the stock’s return. However, the gold funds’ returns can outgrow the price of the metal, which makes it a wonderful opportunity for most investors. It's even better if you want to invest for the long term since the value of gold will only increase further over the years.

Advantages of Investing in Gold Funds

The following are the advantages of gold mutual funds, including a gold ETF.

• Liquidity: Gold mutual funds are highly liquid, which makes it easy to buy or sell them. They are hassle-free and are vastly different from selling gold coins or jewellery.

• Diversification: Gold funds or ETFs help diversify investment portfolios and mitigate risks. It is one of the safest investments even when the stock markets go downward.

• Rupee Cost Averaging: Benefit from rupee cost averaging and reduce the impact of market volatility by investing a fixed sum consistently.

• No Storage Issue: Investing in physical gold would mean having to think about storing it safely. However, investing in gold funds does not come with the same concern since everything occurs electronically.

Taxability of the Gold Mutual Funds

Gold funds are considered debt funds during taxation, so they are divided into two of the following categories.

• Long-Term Capital Gains

  If an investor holds their gold unit over three years, then they get a low tax rate. But if the gains go above a lakh, then it gets taxed at 20%. It reduces the tax burden and adjusts for inflation .

• Short-Term Capital Gains

  Your investment gains become taxable income if your units are sold within three years of their purpose. So, they get taxed according to the income tax slab.

Important Note: Dividend payout from the gold fund will be taxed as income for the investor. No STT or Securities Transaction Tax is applicable when selling or buying units in gold funds.

Who Should Invest in Gold Mutual Funds?

Here are the kinds of investors who should invest in a gold ETF or fund.

• Long-Term Investors:

  Like any investment, gold appreciates with time. It's a great option for those looking to preserve their weight in the form of a gold fund.

• Portfolio Diversification:

  If your goal is to diversify your portfolio, then investing in a gold mutual fund is a great idea. It's a secure investment even when the stock market goes down, and it has a prominent level of liquidity. So, you can sell it off and repurchase it whenever you want.

• People Wanting to Buy Gold:

  If you want to buy physical gold but are concerned about storing it safely, then a gold fund or ETF is a marvellous choice. If one invests in gold mutual funds, then they can redeem it at any point in time.

How are Gold Mutual Funds Different from a Gold ETF?

While gold ETFs and funds may seem synonymous, they have several key differences. Here are some aspects that set them apart.

• Transaction Costs

  A Gold ETF can be traded without associated fees. However, gold funds may impose an exit fee if investors want to redeem their units during the lock-in period.

• Investment Method

  One can purchase gold funds directly from a fund house. In comparison, investors will need to register for a Demat account to buy gold ETFs on stock exchanges.

• Pricing

  Gold funds and ETFs have different pricing mechanisms. The unit prices for a gold fund can be calculated through the net asset value that is reposted at the trading day’s end. However, gold ETFs work on real-time price updates on stock exchanges.

• Liquidity:

  Gold mutual fund units can be redeemed by selling them at the current net asset value. On the contrary, gold ETFs have better liquidity since they are listed on the stock exchange, and they can be bought and sold anytime during the day.

Conclusion

Investing in either a gold fund or ETF will be incredibly lucrative since both have some liquidity and are incredibly beneficial over the long run. But it's necessary to determine what your financial goals are. Depending on that, you can choose between investing in the mutual or exchange-traded funds. They are largely similar, with only a few differences between them.

Both will help diversify your portfolio and provide secure and better returns after a while. At the same time, keep an eye on the tax implications of these funds since there is a tax-saving way of investing in them. One can even seek professional help in managing one's portfolio if diversifying investments becomes a little complicated with time.

Tax Disclaimer: The details related to tax benefits are general information only. Investors are advised that before investing, consult their Tax Consultant or Financial Advisor to determine tax benefits applicable to them.
Kindly note that the details of Sec 80 C mentioned is applicable for old tax regime.

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