What are Gold Mutual Funds in India
Gold is a very important investment asset class for investors in India. Many Indian families buy gold on auspicious occasions. Apart from social, cultural and religious considerations, gold is also a good investment in the long term for many reasons. Gold not only has an important cultural significance in India, but since it has been used traditionally as store of value all over the world, over a long period of time, gold is seen as a hedge against inflation.
During the last 20 years, gold has given almost 9% annualized return which is higher than the risk free fixed income (e.g. bank fixed deposit) returns over the same period.
Broadly, there are two forms of investment in gold – Physical and paper or financial gold.
Physical gold - Investors can buy physical gold in form of jewellery or also as bars or coins. While gold jewellery has aesthetic value, it involves making charges and contains impurities. The jewellery making cost has no financial value as, if you sell the jewellery the buyer will only pay for the weight of gold. The buyer may also deduct the impurities from the weight of the gold when valuing the gold jewellery. The other option is to buy gold in bars or coins. While it does not involve making charges and losses associated with impurities, it involves the cost of storage as in case of jewellery as there is risk of theft.
Paper or financial gold - Investors can also buy paper or financial gold as it mitigates the issues with buying physical gold; no making charges,storage charges and risk of theft. You can buy paper gold either in the form of Gold Exchange Traded Fund(ETF) or Gold funds.Gold Exchange Traded Fund(ETF) is a financial instrument which tracks the price of pure 24 carat gold and trades on stock exchanges like shares of a company. To buy and sell gold ETFs on the stock exchange, you need to have demat and trading account with a stock broker.
However, investors who do not invest in stock market may not have demat and share trading accounts. These investors can still invest in paper or financial gold through mutual fund gold fund of funds, which are also simply known as Gold funds.
Gold funds are mutual fund schemes which invest in Gold ETFs. The investment process of Gold funds is the same as any other mutual fund scheme. If you are mutual fund KYC (Know Your Customer) compliant, you can invest in Gold funds simply by filling up the relevant application form of the Asset Management Company (AMC) in whose fund you are investing.
However, if you are a new investor, you will have to fulfil the KYC requirements by filling up the KYC form and attaching your identity, address proof, Aadhar card copy and a photo. Once you have fulfilled the KYC requirements, you can invest in Gold funds. In fact, if your documents are in order, you can submit your Gold Fund application form and investment cheque along with the KYC documents. The Asset Management Company (AMC) will allot you units of the Gold funds after processing your KYC.
You can also invest online in Gold funds if you are KYC complaint by visiting the AMC website or registering with us for online transactions.
The expense ratio of Gold Funds is slightly higher thanGold ETF, but it is still cheaper compared to investing in physical gold. A major advantage of investing in Gold funds is that, you can invest in it through SIPs (Systematic Investment Plans).
Taxation of Gold Funds
Gold funds are taxed like debt mutual funds. Short term capital gains (investments held for a period of less than 36 months) are taxed as per the income tax rate of the investor. Long term capital gains (investments held for more than 36 months) are taxed at 20% after allowing for indexation benefits. Since gold is usually a very long term investment, the indexation benefit will substantially reduce the tax obligation of Gold fund investors over the long term.
Gold funds are convenient, safe and smarter way of investing in gold assets which as an asset is very dear to the Indian investors.