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As highlighted in our previous articles, investments are made in gold ETFs and sovereign gold bonds instead of having it available in the physical form, providing diversification and tax benefits to investors. However, Gold mutual funds is also a category you should look into when you want to look for an alternative to physical gold.

Gold prices have been soaring new heights amidst COVID crisis, and hence gaining a lot of traction among investors. Usually, investors should allocate 5-10% of their portfolio towards gold. However, how can gold mutual funds serve the purpose?

Gold funds are open-ended funds that directly or indirectly invest in gold bullion or gold producing companies, or in stocks and bonds of gold manufacturers and miners. The objective is to get returns from gold investments in a convenient way. The price of the shares within these funds will majorly correlate to the spot price of gold.

Investment in gold mutual funds offer a combined advantage of fund management and benefits of price of physical gold. With diversifying your portfolio, investment in gold mutual funds can be used as a hedge against inflation and geopolitical instabilities. The returns of a gold fund correspond to those of gold ETFs, however, there is no need to open a DEMAT account to invest in a gold mutual fund as required for ETFs. Also, Gold ETFs are more liquid and involve less transaction cost than gold funds. Benefits of a Gold mutual fund are:

1. Investment in Gold mutual funds is flexible and highly liquid as one may even start investing with an amount as low as Rs 500, instead of purchasing physical gold with the additional charges and maintenance cost due to storage requirements.

2. Gold funds are safest investment avenues (Regulated by SEBI) as it helps to absorb the economic shocks and is a bet against falling currency reducing the portfolio risk.

3. Investment in gold in a much convenient and economical way without a DEMAT account.

4. SIP gold fund helps to inculcate investment disciplines and saving habits by contributing an amount every month.

5. Gold funds that have been subscribed to for more than a year can reap capital gains over the long term. These funds also do not attract wealth tax or securities transaction tax.

6. Units of gold funds can be bought and sold at any time during business hours and from any part of the country. The local price differences will not affect the investor.

Gold mutual funds can be classified as dividend gold mutual funds or growth gold mutual funds. Growth mutual funds are considered a better option due to compounding (reinvestment) benefits. While selecting a fund, you should analyse through different angles, keeping your financial goals, risk appetite and investment horizon in consideration.

As an investor, you should also consider that unlike equity, gold mutual funds are seasonal and may not give exceptionally high returns for the entire duration.

However, gold mutual funds gave exceptional returns last year. They were topping the charts at 23% returns (Jan to June 2020). A conservative investor saving up for gold for future use can invest in gold funds through SIP.

So, which alternative would you choose to invest in?

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