Gold funds are open-ended mutual funds. They carry out investments in units of a gold exchange-traded fund (ETF). The prime purpose of these funds is wealth creation by using the potential of physical gold as a valuable commodity. These funds are best for investors with a low-risk appetite.
- Highly liquid investment: Gold funds can be liquidated hassle-free on short notice. It's easier to trade them than liquidating other kinds of assets. Thus, these funds can protect against an unexpected incident. Besides, the redeemable amount doesn't have any lower limit. So, you can redeem based on your unique financial need.
The funds are redeemable on any business day during market hours. However, for selling, the NAV of the day before is taken into account. Once your funds are traded off, the money is generally disbursed within 2-3 working days.
- Flexible investment amount: You may find physical gold too expensive to purchase. However, in gold funds, you can invest as little as 500 INR (with SIP investment). So, even people with low income can invest in these funds, and purchase any amount based on their requirement more conveniently than with physical gold.
- Safety of investment: Gold mutual funds are regulated by the Securities and Exchange Board of India. So, you can invest in them safely. The SEBI regularly monitors and reports on the performance of these funds. So, you can even measure and forecast your returns.
Investing in these funds is also safer than a physical gold investment. You can electronically invest in the funds with safety and avoid the hassle of storing physical gold that can be stolen anytime.
- Discipline in investment: You can opt for SIP investment for these funds. As the name suggests, a systematic investment plan (SIP) allows you to invest a certain amount in these funds monthly to build a disciplined approach towards consistent saving.
After a few years, if you wish to increase your investments little by little annually, you can go for a step-up SIP. Then you can estimate the returns using an SIP with annual increase calculator.
- Tax savings: Gold mutual funds also allow you to save on taxes. TDS doesn't apply to investments in these funds. Just the taxes applicable to purchasing and selling gold jewellery is levied on the funds.
Risks and How to Mitigate Them
Gold funds, like any asset class, come with certain risks. These include lower returns than equities and diversification challenges.
However, investors choose these funds not with the motive to gain high returns over a long period but invest with low risk.
By investing in these funds with a dynamic approach, you can diversify your portfolio profitably. Consider allocating a portion of your portfolio towards them. During a market crisis, try to increase this allocation. When the market recovers, you can invest more in other asset classes that seem to perform better. Thus, you must focus on the stability gold funds provide your portfolio with and use them as insurance cover.
To conclude, consider investing in these funds strategically to make the most of their benefits.