Name - Sreenivas Guvvala
AMFI Registered Mutual Fund Distributor
India has historically had a deep affinity for gold since times immemorial.
India is one of the largest consumers of gold along with holding massive reserves of the same.
Gold is also seen as a hedge against inflation along with using it as a mortgage against loan.
Gold also holds cultural significance with it being seen as a sign of status symbol and wealth, even though it is demand throughout the year, it sees higher demand during certain festivals like Diwali and Akshaya Tritiya.
What are Gold mutual funds?
Gold mutual funds are mutual fund schemes that invest in Gold ETF’s or equity stocks of gold mining stocks.
Since gold is a global asset, any changes in the prices both domestically and internationally affect the performance of the scheme.
Historically gold has an inverse relationship with equity movement which is why gold is seen as an hedge against stock market volatility.
Gold mutual funds are seen as an attractive alternative to physical gold since such gold mutual funds have no making or storage charges and are more liquid.
Gold mutual funds can be further divided into broadly 3 categories, although these are basically gold.
Gold Funds of Funds (FOF’s)
Gold Funds of Funds are basically gold funds that invest in other gold funds or gold etfs, this provides diversification but adds an extra expense.
Active Gold Funds
Actively managed gold mutual funds are managed by fund managers buying and selling gold mining stocks trying to beat the gold price.
Gold ETF’s
A gold etf is similar to an equity etf except that it tracks the domestic price of physical gold, you can buy and sell units on the stock exchanges for which you need a demat account.
Benefits of Gold Mutual Funds
Diversification
Along with equity and FD’s, one can diversify their portfolio and balance the asset allocation by adding gold.
Gold and equity markets have an inverse relationship and thereby they rarely have a similar trajectory.
Therefore, gold is often seen as a hedge against equity market volatility.
During periods of market uncertainty, gold has the potential for growth more so when equity investments are volatile.
Small amount
Buying physical gold would mean shelling out a substantial amount.
With a gold mutual fund though you can invest via sips starting with an amount as small as 500 rupees per month.
This therefore allows you to invest in gold with a small amount.
This makes investing in gold easily accessible.
You can invest via both a sip and lumpsum option.
Liquidity
As compared to physical gold, gold mutual funds are far more liquid.
Another advantage is that you can redeem only the specific amount that you require.
Physical gold might involve delays in buying and selling unlike gold mutual funds.
This benefit of liquidity makes gold mutual funds an appealing avenue of asset allocation.
Less charges
Gold mutual funds do not require security and storage risks unlike physical gold.
Also unlike physical gold, you need not worry about making charges.
Gold mutual funds do not have these charges since they are held electronically and not in physical form.
No demat required
You only need a demat account if you want to invest in Gold ETF’s.
However you do not need a demat account to invest in a Gold mutual fund or Gold FoF.
This makes the process to invest in gold mutual funds easier and cheap.
Storage
Investing in gold mutual funds is easier than physical gold since they do not require physical storage as compared to physical gold.
You therefore need not have to worry about theft.
Liquidity
Gold mutual funds are more liquid than physical gold since you do not to find a buyer to seller.
They are easier to redeem than physical gold so you can easily retrieve them in case you have an emergency.
Costs
The cost of holding mutual funds is less expensive that physical gold since there are no making charges and so on.
You also do not need a bank locker to store the gold and hence no charges for the same.
Investing in gold mutual funds is a fantastic avenue to invest in commodities without worrying about having a large corpus to invest.
Even though there is no guarantee of fixed returns, they work as a healthy diversification option and thereby help with asset allocation.
Gold is a completely different asset class from equity and fixed deposit, its inverse relation with equity returns is another reason to consider it as an alternative.
ARN Number - 143431
Name - Sreenivas Guvvala
AMFI Registered Mutual Fund Distributor
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
