All that glitters is not gold. But, gold glitters forever- both in demeanour and value. In Indian parlance, gold is given high regard due to various factors. This is one asset that stays in vogue always. This least common metal on Earth has its inherent value from the same fact. People usually call it “the yellow metal”.
The year 2020 has been a roller coaster year for the business environment. Global markets saw a crash while gold was least affected. The best gold funds sure gave very good returns and this trend is predicted to continue in 2021 too. Gold proved to be one of the promising assets of 2020 by a combination of factors like high risk, low interest rates, and positive price momentum. Gold prices will constantly increase as it will be seen as a safe retreat.
When we talk about how we can Invest in best gold funds, we should first know what it is and how to go about it.
What are Gold Funds?
A gold fund is a kind of mutual fund and it invests in gold reserves. These investments may be made in gold-producing companies or gold bullion. This new type of investment eliminates the need to hold the asset in physical form. The gold fund is an open-ended fund and it invests in ETF, Exchange Traded Funds. Anyone who prefers to safeguard their investments against unforeseen instabilities can choose this form.
What are the Options to Invest in the Best Gold Funds in 2021?
Let us look at some of the best gold funds to invest in 2021.
Gold ETF
Gold ETF’s are one of the best gold funds that invest in physical gold. In this type of investment, you are required to maintain a Demat account and the transactions are done through a broker. The brokerage for this is usually around 0.25 % to 0.5% of the cost of the Gold ETF. When you are planning for some profitable returns, you can invest in Gold ETF as this is a better option than physical gold.
Around 90% of your money in an ETF is invested in physical gold and the balance in other types of debt capital. One gold ETF is equal to 1 gram of gold of the highest purity. This is actually holding Gold in electronic form and it is completely transparent. When you plan to redeem, you can get the money credited to your bank account. These are traded on BSE/NSE and can be bought through a broker.
Some of the benefits of ETF are:
- You can be guaranteed the purity of gold since each unit is backed by physical gold with the highest purity factor.
- The income earned is treated as long-term capital gain and so is a tax-efficient way of holding gold.
- It is transparent and is listed on the recognized stock exchange –BSE and NSE.
- These ETFs can also be used as collateral security for taking loans.
- Units are safely held in electronic Demat form.
- There is no wealth tax, no VAT, and sales tax.
Gold Mining Stocks
Gold mining stocks are the other best gold funds to invest in. Some companies are involved in gold mining activities. It is similar to an investment made in a stock market. These stocks are affected by gold price, hedging activities, production cost, etc.
There is a risk factor associated with investments in gold mining stocks. Since there are many uncertainties here, it can be opted by those investors ready to face the challenge as the returns will be higher.
Gold FOF
This is a mutual fund that invests only in gold ETF. Here there is no requirement for a Demat account to be maintained. This is similar to a SIP, the systematic investment plan. It is a safe bet to invest in Gold FOF and the performance tracking here isn’t such a worry because it is taken care of by systematic investments.
What are the Factors on Which Gold Prices and Gold Funds will Depend in 2021?
The Economic Situation of the World
When the economy is effervescent, then investors will move over to other forms of assets leaving gold aside for a while. In 2021, when many lockdown relaxations are being followed, the economy is quite buoyant. This can slow down the path of gold. But to compensate for this there are several other factors that will allow you to invest in the best gold funds.
US Dollar Value
Dollar value also helps in improving the price of gold. The dollar flows into the new markets and will weaken in the due course after which the price of gold will pick up. This is a medium-term concept and could happen soon in 2021. Once the dollar begins to weaken, the price of gold will see an increase. Thus we can see that gold and dollars are inversely related.
Inflation
Printing of more currency would lead to an inflationary situation. The US and many other countries started printing currencies so that they can bring about a boost in the economy. Trillions of dollars have been printed off late. All these ultimately lead to inflation. Inflation and gold prices are directly related. When inflation increases, the gold price also increases and vice versa.
What are the Types of Gold Funds?
Gold ETF – This is for those who wish to buy the physical asses without having to go through the ordeal of storing them. Here the investment is on the physical asset and its value changes as per the price of gold.
Gold Fund – Making investments in units of Gold ETF but without the need for a Demat account.
Gold Mining Funds – Investment is on syndicates that do mining of gold. How these companies perform, determines the value of the fund. It is important to keep an eye on the companies if you have opted for gold mining funds.
What are the Benefits of Investing in Gold Funds?
No Worries About Storage
Gold is highly risky when stored in physical form. You have to be in constant fear of theft. So people investing in gold as bars or jewellery always have a second thought. They need a safe place like a bank locker to store them. Gold funds are devoid of this problem. These can be held in electronic form and so the investors can have peace of mind. Investments in the gold fund have this advantage and that is why this type of investment is preferred.
Liquidity and Diversification Benefits
Liquidity is the ability of an asset to be converted to cash quickly. You need among other assets, some liquid assets to meet your financial needs. Gold funds are highly liquid. They can be easily converted into cash whenever there is an urgent need. This flexibility is one of the main benefits of gold funds.
Diversifying your portfolio with the addition of the best gold funds would be a smart move. Adding gold funds also negates the effects of a fall in the price of other stocks held. Gold is always resorted to as a hedge and it balances the investment portfolio even in times of economic instabilities like that seen in 2020. 10 to 20 % of the total investments can be diverted to Gold funds.
Less Volatile Asset
Whenever the economy fluctuates, the markets tumble. The stocks become the first ones to be affected. In such times, gold funds are the ones that stay as a hedge fund. They are not volatile like the other stocks. We have always seen this as a trend in stock markets, whenever stocks come down gold rises up. When you have a variety of investments in your portfolio, this will help balance out the effects and keep your position stable.
Even after the second wave of covid-19 started to surface, gold funds and Gold Exchange Traded Funds saw a net inflow of Rs. 864 crores in the month of April 2021. The potential threat of economic disturbances gave Gold the opportunity to show its strong position as it remained quite profitable. Though the values are much less compared to 2019-20, it still is picking up. The World Gold Council predicts gold to rebound in 2021 as the economic growth has picked up. The festival season during the end of 2020 coupled with improvements in the economy saw a Gold import of 164.4 tonnes in India.
How to Invest in the Best Gold Funds?
- The first step is to open a Demat account and a trading account. This can be done online and there are many authorized websites for this.
- Provide basic documents like PAN, address proof, ID proof.
- After this, your account will be created from where you can choose the best gold fund and buy it.
- These are bought as units just like shares and are credited to your Demat account.
- You can continue to hold them until redemption when money for the funds held is credited to your account.
After going through the detailed analysis above, I hope the information would be helpful to decide on whether gold funds can be a good investment choice for 2021. If you are not willing to hold gold in the form of jewellery or other physical forms, Gold funds can be a good choice then. This can provide high liquidity in times of need and can be good support for immediate money availability without losing value.
To start investing in this form of asset, you should know your goals and the risk involved here. It can be used as a good means to diversify your portfolio and cannot be relied upon as a single source. Also, Gold funds are not to be seen as the main income generators in the investment portfolio. As discussed, it can be taken as a refuge in times of crisis.
Make sure you make informed decisions on investments after proper research and analysis of the situation.
Read More: Looking Closely At Gold As An Investment
FAQ
What is the purpose behind investing in gold funds?
Gold funds are investments that mainly help during times of market volatility. This investment is considered when planning for the diversification of the investment portfolio. Being a low-risk factor, adding gold funds to your portfolio would be beneficial.
Are gold funds taxable in India?
Taxes are levied similar to that on gold jewellery. The period for which the funds are held is to be considered while calculating taxes. If they are held for less than 3 years, it is a short-term investment and so is added to the gross income of the investor. If held for more than 3 years then it is a long-term investment. In this case, the tax would be 20% and also a cess over and above this.
How do you measure Gold ETF performance?
This can be measured by a factor called tracking error. It measures the difference in performance between the fund and its benchmark. We can consider that if the tracking error is lower, then the ETF is better.
Does currency exchange risk affect gold funds?
Gold funds are exposed to fluctuations in the value of the exchange rate. This is more so in this dealing internationally. Any change in foreign currency that you are involved in the transaction, affects the prices also.
How to redeem gold funds?
Gold funds can be sold as and when the investor prefers to do. Here, the Net Asset Value (NAV) of the previous day will be taken as the basis for calculation purposes. After you have given the option for redemption, the funds will be credited to your bank account in 2-3 working days.
How to select the best gold funds for investment?
The fund has to be analyzed from different perspectives. Keep your financial goals, risk appetite, and investment horizon in mind. The number of years by which you will get returns is also another point to be considered. Based on the recent performances, the following are some good options: Axis Gold Fund, Aditya Birla Sun life Gold, SBI Gold Fund, HDFC Gold fund.
