How Do the Open-Ended Gold Funds Work?

in #goldfunds2 months ago


Gold funds offer investors an opportunity to invest in the yellow metal without having to worry about taking its possession and keeping it safe. These open-ended mutual funds invest in the units of a gold exchange-traded fund intending to create wealth. Suitable for investors looking to invest in gold and benefit from the fluctuation in its prices, the gold funds in India are highly popular. The key feature of these open-ended funds is liquidity which means an investor can buy or sell these funds at any time at the Net Asset Value of NAV which is declared daily.

Working of the Open-Ended Gold Funds

The Gold Funds are managed by fund managers who take investment decisions as per the set objectives of the fund. The returns of a gold fund are closely related to the Gold ETF which invests its corpus in the gold bullion of 99.5 percent purity.

Any fluctuation in the price of gold impacts the gold ETFs which in turn has an impact on the NAV and the performance of these mutual funds. The Gold ETFs hold gold as an underlying asset and have to pay the carrying cost for the same.

The investors can offload their holdings in these funds at any time during the market hours of a working day.  The redemption is done at the NAV of the previous day and the money is disbursed within 2-3 business days of the fund being traded off. Some funds levy an exit charge when you offload your holdings. These gold funds also carry charges that are reflected in their expense ratios.

Benefits of Investing in Gold Funds

The yellow metal is preferred by investors looking to reap the benefits of appreciation in its prices. Here are some reasons for investing in gold funds:

  • Flexible Investment Amount - Investment in gold funds can be made for any amount subject to the minimum requirements put forth by each mutual fund. Since the minimum investment amount is as low as Rs 1000, it even allows individuals with low income to participate.
  • High Liquidity - A major advantage of investing in gold funds is that you can liquidate your holdings at a short notice and that too without any lengthy procedures.
  • Safety - One of the safest investment options, gold funds are regulated by the Securities and Exchange Board of India or SEBI which periodically monitors mutual funds.
  • Convenient - Investing in mutual funds is convenient than buying physical gold which carries with it the risk of storing it safely.
  • Good for Diversification - Investment in gold mutual funds allows you to diversify your investment portfolio and reduce the overall market risk. The prices of gold are not related to the stock markets thereby mitigating the risk involved in investing in stocks.
  • No-TDS - No tax deduction at the source or TDS is applicable on gold funds in India. Instead, only the taxes applicable to buying and selling jewelry is levied on these funds.

How to Invest in Gold Funds?

Investment in gold funds in India is easy and can be done directly via the mutual fund company or through brokers. You do not need to open a demat account to invest in gold funds as is required when you wish to invest in gold ETFs. You can also invest in these mutual funds through the SIP (Systematic Investment Option) mode. This means you can invest a specific amount every month or quarter and purchase the units of the mutual fund.