India is one of the world’s largest markets for gold, as the precious metal has always been revered and considered auspicious. A symbol of affluence and prosperity, gold is deeply entrenched in India’s cultural heritage. While the gold market briefly plunged at the start of the year with the imposed lockdown, the demand for gold has seen an upswing across the globe since the onset of the pandemic. And it is expected to pick up as the festive season begins as gold demand is likely to play an integral part in India’s economic revival.
Since gold has always been a reliable ally during financial hardships and is less volatile as an asset, gold is considered a low-risk, safe investment option—especially during uncertain times—as compared to other investments such as stocks. For gold to be purchased for investment purposes, there is no right or wrong time. Experts believe that every investor should have some gold in their portfolio. Gold consumption is primarily driven by need, be it weddings or religious functions, but seeing how global economies have come to a standstill this year, it is even more imperative to enter this asset class now and add gold to your investment profile.
Things you must consider if you want to invest in gold mutual funds
Investments in gold mutual funds for more than 3 years are regarded as long-term and the gains thereof are called long-term capital gains (LTCG). The LTCG on gold is taxed at a 20% rate with indexation benefit (plus surcharge, if any, and cess), whereas short-term capital gains (STCG) are taxed as per the slab rate applicable to the investor.
Gold should be used as a tool to diversify your investment portfolio. In the long-term, gold can provide stability to your portfolio. You can start investing in gold mutual funds with as low as Rs 1000 through a monthly SIP.
Now, many companies are offering gold mutual fund products and you should select the best one based on some key factors. Look at the level of returns that the mutual fund company has provided in comparison to physical gold. If the returns are similar or higher, it may show the efficiency of the AMC. Also, check the average returns generated by other gold mutual funds and check the expense ratio of the shortlisted gold funds because the low expense ratio might allow you to earn higher returns.
Gold usually performs well whenever uncertainties grip the markets, like during the 2008-2011 global financial crisis and again during the ongoing Covid-19 turmoil. In fact, the prices of the yellow metal have increased by 25% since March 2020. However, it’s also a fact that since these risks are not of a permanent nature, the gold prices also tend to flat-line over long periods of time. So, it might be a good idea to use it as a hedging tool and limit your gold investments to a maximum 10% of your total investment portfolio’s value.
However, your investments in gold mutual funds should also be dynamic, i.e. you might want to stay invested in gold during high-risk phases, but when the risk starts fading away, you should consider reducing your exposure in gold and shift towards better-performing asset classes.