Looking to invest in gold mutual funds: From factors to top gold funds here’s all you need to know

Given gold’s appeal as a safe haven and an inflationary hedge, experts have always advocated keeping gold in one’s portfolio for stability, diversification and other benefits. And now as different investment forms in gold have unfolded over the years, gold mutual funds, gold ETFs and Sovereign Gold Bonds (SGBs) have primarily taken over physical gold buying due to their inherent advantages. 

Here below we will delve in detail on Gold Mutual funds:

What are Gold mutual funds?

Gold mutual funds typically invest in gold in different forms, including physical gold, gold-related securities and gold mining companies. The investment avenue offers convenience to investors as it provides exposure to gold in a cost-effective way doing away with the need to hold physical gold.

Factors to note when buying Gold mutual funds

Tapan Patel, Fund Manager-Commodities, Tata Asset Management says that deciding on your gold mutual fund purchase requires a strategic approach amidst fluctuating market conditions. Diversification remains paramount, with allocating 8-10% of your portfolio to gold offering stability amid uncertainty.

Here below are key factors you need to account for before zeroing in your gold mutual fund bet:

Ascertain your investment goals, risk appetite and return expectations:

Like with other investments you need to first understand your investment goals as well as your risk appetite. Sarvjeet Singh Virk, Co-founder & MD, Shoonya by Finvasia notes that there are different kinds of gold mutual funds available, from those investing directly in gold to those investing in gold mining companies. Each type has its own levels of risk and potential returns, so it's important to pick one that fits your risk tolerance. 

Check past performance of the funds

Although looking at a fund’s past performance won’t predict future results, it does give you an idea of how well the fund has handled market ups and downs compared to others. It’s a good idea to check how the funds have done over various periods to get a better picture, added Virk.

Determine liquidity aspect

Gold mutual funds are known for being easy to buy into and sell out of, which is handy. However, always check if you can easily sell your holdings at fair market prices, especially when the markets are tough. Some funds even let you cash out within 24 to 48 hours. 

Fees, expense ratio

For the management of your gold mutual funds, fund houses may charge some fees or expense ratio which you should be aware about. Choosing the fund with a lower expense ratio can go a long-way in offering you better returns.

Taxes

For short term investors, with gold mutual funds held for 3 years or less, any gains will be added to the income from other sources and taxed according to applicable slabs. Nevertheless, long-term capital gains on gold mutual funds for investments held over 3 years, taxes at the rate of 20 per cent plus 4 per cent cess would apply.

Top gold mutual funds with trailing 1 and 5-year  returns and their likely worth in 5 years via SIP investment