What Are Gold Mutual Funds?
A gold mutual fund is an investment scheme that collects money from various investors to invest in gold-related assets. Instead of you buying a gold coin or bar directly, a professional fund manager uses the pooled money to purchase units of Gold Exchange
Traded Funds (ETFs). These ETFs, in turn, hold high-purity physical gold. So, when you invest in a gold mutual fund, you are essentially buying a slice of a large gold portfolio without the hassles of physical ownership. The value of your investment moves in line with the market price of gold.
The Power of Starting Small with SIPs
The biggest advantage for a young earner is affordability. You don’t need a large lump sum to get started. Gold mutual funds allow you to invest through a Systematic Investment Plan (SIP), where a fixed amount is invested automatically every month. Many funds allow SIPs to start with as little as ₹100 or ₹500. This disciplined, periodic investment helps you accumulate gold units over time without feeling a pinch in your monthly budget. It also averages out your purchase cost, a strategy known as rupee cost averaging, which mitigates the risk of investing a large sum at a high price point.
An Edge Over Physical Gold
While owning jewellery or coins has its emotional appeal, it comes with several drawbacks for a pure investment purpose. Physical gold involves making charges, which can be anywhere from 8% to 25% of the value, and these are not recovered upon selling. There are also concerns about purity, storage costs (like bank locker fees), and the risk of theft. Gold mutual funds eliminate all these issues. There are no making charges, no storage hassles, and since the funds are regulated, the purity of the underlying gold is assured.
Liquidity and Convenience
Compared to other forms of gold investment, mutual funds offer excellent liquidity. You can buy or sell your fund units on any business day at the prevailing Net Asset Value (NAV). This makes it a practical option if you need access to your money for an emergency. This is a key difference from Sovereign Gold Bonds (SGBs), which have a lock-in period of eight years, though they can be traded on the stock exchange after five years. Furthermore, unlike Gold ETFs, you do not need a demat account to invest in gold mutual funds, making the entry process much simpler for a beginner.
How to Start Your Gold Investment Journey
Getting started with gold mutual funds is a straightforward process. First, you need to be KYC (Know Your Customer) compliant, which is a one-time process for most financial investments in India. You can then choose a fund from any of the numerous Asset Management Companies (AMCs) available. Most platforms allow you to start an investment online in a few clicks. You can opt for a lump sum investment or, more suitably for regular saving, set up a monthly SIP. From there, the fund manager takes over, managing the investment professionally on your behalf.
Understanding the Tax Implications
It's important to be aware of how your returns will be taxed. For gold mutual funds, gains are considered short-term capital gains if you sell your units within 24 months of purchase and are taxed at your applicable income tax slab rate. If you hold your investment for more than 24 months, the profits are considered long-term capital gains and are taxed at a rate of 12.5% (plus cess). Unlike equity funds, there are no tax-free exemptions for these gains.
