Gold mutual funds have recorded returns of over 10% in the past year alone. This surge in performance coincides with a surge in gold prices, which recently breached the $2,200 per ounce mark globally. Back home, the yellow metal hit a fresh lifetime high of ₹66,943 per 10 grams.
The trigger behind this rise lies in a confluence of global factors, including signals from the Federal Reserve indicating potential interest rate cuts amidst rising inflation.
Geopolitical tensions and macroeconomic uncertainties have further contributed to the allure of
gold as a safe haven asset.
In such a landscape, gold emerges as a decent investment avenue.
Alekh Yadav, Head of Investment Products at Sanctum Wealth, a wealth management firm, stressed on strategic allocation to gold within investment portfolios.
While talking to CNBC-TV18.com, he mentioned the negative correlation between gold prices and equity markets.
"This makes gold an effective hedge against volatility and market downturns," he said.
He said the inclusion of gold can lower overall portfolio volatility without significantly compromising expected returns.
But why gold mutual funds?
Here are some factors that make gold mutual funds attractive:
Diversification
Gold mutual funds typically invest in a diversified portfolio of gold-related assets such as gold bullion, gold mining stocks, and gold ETFs.
This diversification helps spread risk across multiple assets within the fund, reducing the impact of underperformance of any single asset on overall returns.
In contrast, direct investment in physical gold or gold bars lacks this diversification.
Professional management
Gold mutual funds are managed by professional fund managers who have expertise in analysing gold markets and making investment decisions.
These managers actively monitor market conditions, adjust portfolio holdings, and seek to optimise returns for investors.
Liquidity
Gold mutual funds offer high liquidity, allowing investors to buy and sell fund units on any business day at the prevailing net asset value (NAV).
This liquidity makes it easy for investors to enter and exit their positions without incurring significant transaction costs associated with physical gold ownership.
Cost efficiency
Gold mutual funds typically have lower investment minimums and expenses compared to other gold investments such as purchasing physical gold or investing in gold mining stocks individually.
Additionally, the operational costs associated with storing and insuring physical gold are eliminated in gold mutual funds.
Tax efficiency
Mehak Srivastava, Head of Marketing at SahiBandhu, a gold loan platform, suggested investors opt for mutual funds due to their potential for capital gains.
Capital gains realised from selling fund units may be subject to favourable long-term capital gains tax rates, depending on the holding period.
If the price of gold rises, the value of the assets held by the mutual fund also increases. This leads to capital gains for investors when they sell their mutual fund units at a higher price than they paid for them.
Additionally, dividends or capital gains distributions received from gold mutual funds may be taxed at lower rates compared to direct investment in gold mining stocks.
A look at returns of gold mutual funds
| Fund Name | 1-year CAGR | 3-year CAGR |
|---|
| Kotak Gold Fund (G) | 8.9% | 11.7% |
| HDFC Gold Fund (G) | 9.8% | 12.1% |
| Nippon India Gold Savings Fund (G) | 9.1% | 12.0% |
| SBI Gold Fund (G) | 9.9% | 12.2% |
| Axis Gold Fund (G) | 9.5% | 12.2% |
| Quantum Gold Savings Fund (G) | 8.8% | 12.1% |
| Invesco India Gold ETF Fund of Fund (G) | 8.7% | 12.0% |
(Source: Scripbox; CAGR stands for compound annual growth rate)
A word of caution
Nitin Shahi, Executive Director at Findoc, a financial service provider, urged caution amid the enthusiasm surrounding gold mutual funds.
While gold mutual funds present an enticing avenue for investment, Shahi emphasised the need for diversified investing tailored to individual risk tolerance and financial objectives.
This means that investors should not solely focus on gold mutual funds but instead consider building a diversified investment portfolio that includes a mix of different asset classes, such as stocks, bonds, real estate, and alternative investments, in addition to
gold.
