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August 7, 2020

Know Benefits of Investing in Gold Funds

by Rubina Dsouza in Income Tax, Stock Market

Know Benefits of Investing in Gold Funds

Introduction

Gold prices soared to new record highs as investors sought safe haven due to health of the global economy ravaged by the COVID-19 pandemic. Gold is a unique asset – highly liquid, yet scarce. It is a luxury good as well as an investment. There are many ways to buy gold. Different products can be used to achieve a variety of investment objectives.

Some investment options in gold are:-

Buying physical gold – Small bars and coins accounted for approximately two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for bars and coins has quadrupled since the early 2000s. 

Buying gold-backed ETFs – Physically-backed gold exchange traded funds(ETFs), exchange traded commodities (ETCs) and similar funds account for approximately one-third of investment gold demand.

Buying into allocated gold accounts – Bullion banks offer their institutional or high net-worth customers allocated gold accounts consisting of gold deposits and resembling currency accounts. The holder of an allocated account is the legal owner of a specific quantity of gold. Bullion banks also offer unallocated accounts. In an unallocated account, a customer does not own specific bars or coins, but has a general entitlement to a set amount of gold. The investor is not the legal owner of any physical gold, but rather is a creditor of the provider.

Internet Investment Gold – An increasingly common way of accessing the gold market is Internet Investment Gold (IIG). Internet Investment Gold allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise. Internet Investment Gold offers investors a highly convenient way to benefit from outright ownership of physical gold. 

Buying gold derivatives: futures, forwards and options – Investing in derivatives requires more knowledge of financial securities than other forms of investing and may not be suitable for all investors. Derivatives trade over-the-counter (OTC) and on exchanges. Derivatives traded on exchanges settle in a central clearing house that matches buyers and sellers. OTC derivatives are bilateral contracts that have more flexible structures but include additional counterparty risk. 

Buying gold mining stocks – Investors can invest in shares of gold mining companies.  Gold mining company stocks may correlate with the gold price. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold. 

Investment in gold funds is nowadays being preferred over investment in physical gold due to a variety of advantages. Some of the advantages of investing in gold funds include: 

No Storage Issues

  1. With physical gold, you may face issues like fear of theft and storage charges among others. You need to store your gold bars, coins or jewellery in a safe place like a bank’s locker, or a safe at home.
  2. If you choose to store it in a bank, you are required to pay storage-related costs.
  3. Physical gold also might lose its shine over time due to storage issues, thereby decreasing in value.
  4. These problems do not occur with Gold funds, as funds are electronic investments. In case of gold funds, one can enjoy the advantage of owning pure gold with the convenience of it being an electronic investment.

Great Option to diversify the portfolio

  1. One of the most important rule of investing is have a diversified portfolio. A diverse portfolio can weather an economic storm better than a simple one.
  2. Gold mutual funds are an excellent investment option to diversify one’s investment portfolio and reduce overall market risk.
  3. As a physical asset, gold prices are not directly related to company stocks.
  4. If you have a large portfolio of which equity forms a core part, gold funds may provide you much-needed stability without letting your wealth creation goals affected.
  5. Investors can minimize market risk by assuring return when other asset classes are performing poorly.

High Liquidity

  1. Another major advantage of a gold fund is that it can be liquidated in short notice and without much hassle.
  2. In fact, compared to any other asset, liquidating gold is the quickest and easiest in India, which makes them ideal as a financial cushion to protect against an unforeseen incident.
  3. If there is an urgency of cash, having highly liquid investments could be in the best interest as they can be easily converted to cash once redeemed.

Comparatively less volatile

  1. Whenever there is an economic crisis, the market fluctuates, and stocks are the first to be affected.
  2. During such times investing in gold funds could be a good idea. Gold funds could serve as a good hedge against the equity market volatility.
  3. Historically, when stocks have gone down, the prices of gold have moved up. Hence, investing in gold through funds is likely to balance out any volatility in equity investments.

Requires nominal investment amount

  1. Gold funds offer greater convenience than physical gold as it allows an investor to purchase any amount of funds as per their requirement.
  2. One can invest as little as Rs 500 in gold funds as a lump sum or SIP.
  3. This makes investing in gold funds more convenient than physical gold.
  4. It also defeats the notion that one needs to have a large sum of money to buy or invest in gold.
  5. Instead of purchasing physical gold, which often carries a significantly high cost, it offers more flexibility to an investor.

Highly tax-efficient alternative

  1. Gold exchange-traded funds (ETFs) invest in physical gold, and gold mutual funds invest in gold ETFs. Both mirror the price movement of physical gold. The taxation and exemption rules for them are the same as for physical gold.
  2. One may invest in gold if they wish to save on taxes.
  3. The long term capital gains from the funds get the indexation benefit.
  4. Also, your initial investment gets adjusted to incorporate the effects of inflation so as to lower your tax liability.
  5. Along with this, the resultant gains are taxed at lower rates as an added advantage.

Safe haven during uncertainties

  1. Unlike stocks and bonds, gold is considered to be a safer haven that one may count on when the markets go down.
  2. Thus, gold mutual funds might be the go-to option to earn a positive return on investment as gold prices tend to appreciate during tough times.
  3. Gold funds are a safety net and hedge against the currency fluctuation and market inflation

Introduces investment discipline

  1. These funds help new investors learn about the crucial disciplines of investment.
  2. Investing in gold through SIP requires an individual to put a particular amount in these funds every month, which introduces the habit of saving.
  3. Investors can also learn financial discipline by investing in these funds for long or short-terms.

Investing in gold funds is an intelligent way to take exposure in gold. But at the same time, one needs to understand that fund value may fluctuate and there are no guaranteed returns on investment. Choose a fund only after you are convinced about its growth potential.

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