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Invest in Top Gold Funds In 2022: High Return Mutual Funds In India

Get to know all about investing in Top Gold Funds.

Gold mutual funds: Accumulate gold for financial goals with SIP

Many people prefer to accumulate gold in electronic format through gold exchange-traded funds (ETFs), gold mutual funds, digital gold, Sovereign Gold Bonds (SGBs). In the case of all the above ways, except for gold mutual funds, an investor has to invest manually every time if they want to accumulate gold regularly in small chunks. Only gold mutual funds provide the systematic investment plan (SIP) option to accumulate gold regularly in small chunks. A gold mutual fund SIP option is a convenient way to accumulate gold regularly for long-term financial goals like building a gold fund for a child's marriage. This article discusses how to invest in top gold funds in 2022.

What are gold mutual funds?

A gold mutual fund is a financial product offered by various AMCs that allows investors to invest in gold in electronic format. A gold mutual fund collects money from investors and invests it in gold exchange-traded fund (ETF) units of the same AMC. The gold ETF further invests the money in physical gold on behalf of investors. The fund house allots you gold mutual fund units in proportion to your investment. One gold fund unit is equivalent to one gold ETF unit, which is usually equivalent to one gram of gold. The price of one unit of gold mutual fund tracks the price of one gold ETF unit, which in turn tracks the price of 1 gram of physical gold.

The gold mutual fund house declares the net asset value (NAV) of a single gold fund unit. Your profit or loss depends on the difference between the current price of one gold mutual fund unit and the price at which you bought the unit. Gold mutual funds are also known as gold fund of funds (FoF).

You don't need a demat account to buy gold mutual fund units. You can invest in gold mutual fund units in a lumpsum or start a systematic investment plan (SIP). The purchase and redemption of gold mutual fund units are done through the mutual fund house.

Returns given by the best gold funds

Let us now look at the returns given by some of the best gold mutual funds.

Table: Returns given by gold funds

Scheme nameAUM (Rs. crores)1-year3-years5-years
Kotak Gold Fund1,1746.30%13.76%10.53%
Axis Gold Fund2496.38%13.55%10.47%
SBI Gold Fund1,1046.24%13.59%10.20%
HDFC Gold Fund1,2776.33%13.47%10.19%
Invesco India Gold Fund476.13%13.38%9.97%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/fund-of-funds.html)

Note: The returns are as of 18th Feb 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.

The above table shows the best gold mutual fund has given returns of 10.53% CAGR in the last five years.

Who should invest in gold mutual funds?

The following individuals should invest in gold mutual funds:

  1. Portfolio diversification through asset allocation: As an investor, if you want to spread your investment portfolio among various asset classes to diversify your risk, you should invest in gold mutual funds for the gold portion of your investment portfolio.
  2. To create wealth: Gold as an asset class has done well in the past and has given good returns to investors. So, if you want to create wealth, you should invest in gold mutual funds.
  3. Safe haven: Gold acts as a safe haven during stock market downturns due to events such as recession, war, pandemic, political instability, etc. So, if you are looking for a safe haven during such events, you should invest in gold mutual funds.
  4. Inflation hedge: Gold acts as a hedge against inflation. So, if you wish to protect your investment portfolio against inflation, you should invest in gold mutual funds.

Taxation of gold mutual funds

Let us understand the taxation of gold mutual funds:

  1. Short-term capital gains (STCG) tax: If you sell your gold mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
  2. Long-term capital gains (LTCG) tax: If you sell your gold mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.

Risks involved in gold mutual funds

The price of gold, just like any other asset class, goes through its own cycles of ups and downs. Sometimes, these cycles can go on for years in one direction before reversing direction. Gold mutual funds track the price of gold ETFs, which track the price of physical gold. So, there is a risk of losses if you invest in gold mutual funds during a down cycle till it reverses and the next upcycle begins.

Return potential of gold mutual funds and compounding effect

In the table in the earlier section, we saw how gold has given around 10% CAGR in the last five years, which is a good rate of return. Your near-term returns from gold mutual funds depend on whether gold is in an upcycle or a down cycle at the time of your investment. However, long-term investors need not worry about the upcycle or down cycle. You can regularly invest in Gold mutual funds and benefit from the power of compounding in the long run.

You can start a systematic investment plan (SIP) in a gold mutual fund for regular disciplined investing

What are the advantages of gold mutual funds?

Some of the advantages of investing in gold mutual funds include:

  1. Gold mutual funds give you an opportunity to invest in gold in electronic format. So, you don't need to worry about purity. You also don't need to incur storage costs like bank lockers and insurance costs.
  2. You can invest in gold mutual fund units without a Demat account, unlike gold ETFs where a Demat account is compulsory.
  3. You can start a SIP for investing in gold mutual funds, which is not possible in the case of gold ETFs.
  4. You can invest in fractional units in gold mutual funds, unlike gold ETFs where the minimum investment amount is one unit, which is equivalent to the price of 1 gram of gold.

Reasons to invest in gold mutual funds

For many individuals, one of the biggest reasons for investing in gold mutual funds is to accumulate gold for long-term financial goals, such as accumulating gold for your child's marriage. Apart from that, people invest in gold for capital gains, to hedge their investment against inflation, and as a safe haven against economic uncertainties.

Asset allocation: Gold mutual funds provide investment portfolio diversification

Asset allocation requires individuals to diversify their investment portfolio across various asset classes such as equity, gold, fixed income, real estate, etc. Gold mutual funds are a good financial product to invest the gold allocation portion of your investment portfolio.

To start investing in gold mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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