Gold is a popular investment tool in India. Gold ornaments and jewellery are favourite among both men and women among Indians. The reason people have been investing in India for many years is because it has always offered capital protection against inflation and rupee depreciation. Today, it is possible to invest in gold without having to buy it in physical form like coins, bars etc. With gold mutual funds, it is now possible for retail investors to invest in gold as an asset without having to buy and preserve actual gold.
What is a gold fund?
A gold fund is an open ended mutual fund scheme which invests in gold exchange traded funds. It is an open ended scheme that may invest in a gold fund of fund investing or gold ETFs and try to replicate its performance to generate capital appreciation. Investors who seek indirect exposure to gold funds or wish to own gold in digital form can consider investing in gold funds.
What are the advantages of investing in gold funds?
Here are some of the advantages of investing in gold funds –
Gold acts as a hedge against inflation
Gold as an asset class has an inverse relation with inflation. During inflation why the stock market is down, and the stocks are underperforming, gold as an asset class has always offered far better returns. During inflation, even debt instruments seem to underperform which makes gold funds an ideal investment option. Gold can offer the necessary cushion and even out your portfolio’s losses.
Gold funds offer liquidity
Investors are free to buy as many units as they want of sell their gold fund units during market hours. There is lock-in which allows investors to sell their gold fund units and convert it into cash to tend to their income needs.
Gold funds offer diversification
When inflation strikes, not just equity but even debt funds aren’t able to deliver decent returns. It is a must to invest in gold funds to add necessary diversification to your investment portfolio. Diversification reduces overall investment risk and has an inverse relationship with the equity market and the rupee. This is why it is advisable to invest in gold to adequately diversify and minimize investment risk.
No issue with storage
Gold funds gives investors the leverage of owning gold in digital form. This means investors do not have to worry about the security of gold, they do not have to spend on bank safety vaults to preserve it. Investors can invest in gold without having to deal with the hassles of owning it in physical form.
SIP investment option
If you do not wish to invest the entire investment sum all at once you can invest in gold funds via SIP. Systematic Investment Plan or SIP is a simple and convenient way to ensure that you save and invest a fixed sum at regular intervals in gold funds. Retail investors can decide a sum and invest that at regular intervals in gold funds till their investment objective is accomplished. Investors can benefit from power of compounding and rupee cost averaging by investing in gold ETF funds via SIP for the long run. They can even use SIP calculator to determine the overall returns which they might receive at the end of their SIP investment journey.
Disadvantages of investing in gold funds
Gold funds may offer liquidity, but they aren’t liquid like gold ETFs. Investors can buy or sell units of gold ETFs during live trading hours at their current price. However, investors can buy or sell their gold fund units by placing an order request to the fund house.