Is It Good To Invest In Gold Mutual Funds in 2025?

As the festival of Diwali approaches, the inclination towards buying gold amplifies due to its cultural significance and its traditional standing as a symbol of prosperity and wealth. However, in the modern age, the scope of investing in gold has expanded beyond purchasing physical gold to include financial instruments such as Gold Mutual Funds. This article will delve into the factors to consider before investing in gold mutual funds this Diwali, helping investors assess whether it is a prudent decision.

Understanding Gold Mutual Funds

Gold Mutual Funds are essentially funds that invest in gold ETFs (Exchange-Traded Funds) and other related assets. These funds aim to track the price of gold, hence offering investors a way to gain exposure to gold without the necessity of physically holding the metal. The returns from these funds are dependent on the performance of gold prices, and they can be a good hedge against inflation and economic uncertainties.

The Performance of Gold Mutual Funds

One crucial factor to consider is the historical performance of gold mutual funds. Over the past decade, the price of gold has seen considerable ups and downs. For example, the price of gold hit an all-time high of approximately ₹57,000 per 10 grams in August 2020 during the COVID-19 pandemic, driven by market volatility and economic uncertainty. Comparing this to gold prices in October 2023, which hover around ₹52,000 per 10 grams, investors can see a decline, albeit still significantly higher than prices five years ago when gold traded around ₹29,000 per 10 grams in October 2018.

Benefits of Investing in Gold Mutual Funds

1. Liquidity: Unlike physical gold, gold mutual funds offer high liquidity since they can be bought and sold on stock exchanges any time during market hours.

2. Safety: Investors don't have to worry about the purity and security risks associated with holding physical gold.

3. Cost Efficiency: There are no making charges or storage costs involved, making it a cost-effective investment avenue.

4. Diversification: Adding gold mutual funds to a portfolio can provide much-needed diversification, reducing overall portfolio risk.

5. Taxation: Long-term capital gains tax (LTCG) on gold mutual funds is 20% with indexation benefits if held for more than three years. This can lead to substantial tax savings compared to the tax implications of selling physical gold.

Risks and Considerations

1. Volatility: The prices of gold mutual funds can be volatile as they are directly linked to gold prices, which can fluctuate based on global economic conditions, geopolitical tensions, and currency values.

2. Expense Ratios: These funds come with expense ratios which can eat into the returns. Moreover, actively managed gold mutual funds usually have higher expense ratios than passive ones.

3. Tracking Error: Gold mutual funds might have tracking errors, leading to a scenario where the fund's performance does not perfectly mirror the performance of gold itself.

Alternatives: Gold ETFs

Gold ETFs present an alternative to gold mutual funds. Gold ETFs are essentially units representing physical gold which are traded on stock exchanges. They combine the flexibility and convenience of stock investing with the simplicity of gold investment. While both gold mutual fund and ETF invest in gold, the latter tends to have lower expense ratios and minimal tracking errors, making them a more direct form of investment in gold.

Calculations: Understanding Potential Returns

Suppose an investor decides to invest ₹1,00,000 in a gold mutual fund this Diwali. If the annual return on gold mutual funds is historically around 10%, then by the end of the year, the investment could grow to approximately:

₹1,00,000 (1 + 10%) = ₹1,10,000

However, if the expenses ratio of the mutual fund is 1.5%, the net returns would reduce accordingly:

Net Return = ₹1,10,000 - ₹1,00,000(1.5%) = ₹1,10,000 - ₹1,500 = ₹1,08,500

Conclusion

Investing in gold mutual funds this Diwali could offer a lucrative opportunity for diversification, safety, and potential growth, provided the investor is comfortable with the associated risks and costs. While the historical performance of gold investments has shown promising returns, it is imperative to navigate this path with caution, considering both the pros and cons.

Disclaimer

The views expressed in this article are for informational purposes only and do not constitute financial advice. Investing in the Indian financial market requires thorough research and professional guidance. Investors are urged to gauge all the pros and cons, taking into account their financial goals and risk tolerance, before making investment decisions.

Summary:

As Diwali arrives, many consider investing in gold, not just physically but through financial instruments like gold mutual funds. These funds track the price of gold and provide investors an advantage in terms of liquidity, safety, and cost-efficiency compared to holding physical gold. Historical performance shows that gold prices have been volatile but generally promising, making gold mutual funds an attractive hedging tool against inflation and economic uncertainties. However, investors should weigh the investment's liquidity, potential returns, risks associated with volatility, and expense ratios. Furthermore, gold ETFs present another viable investment option with typically lower costs and minimal tracking errors. It is crucial for investors to thoroughly evaluate all aspects of trading in the Indian financial market before investing.