Want to invest in gold but don’t want the hassles of keeping jewelry or coins – sounds familiar? Well, Gold funds could be the answer to your dilemma.
Looking to invest in Gold funds but don’t know too much about them? Here are some basic facts to get you started.
What are Gold funds?
Gold funds are similar to mutual funds except that they invest in gold instead of debt instruments or equity shares. A unit of a Gold fund is nearly equivalent to a gram of physical gold.
How does it work?
A Gold fund collects money from investors and uses it to buy gold in physical form. Of the total money collected, a major portion is used to buy gold and the rest is invested in low-risk debt products such as bonds and money market instruments. It does not invest in equities. As the major portion of funds is invested in gold, the performance of the fund depends on the price movement of gold. The performance of the fund is reflected in its Net Asset Value (NAV). This gives you a chance to make fresh investments even after the initial offer closes.
Is it suitable for all?
Till date investment in gold has always been through jewelry or coins. But there is a physical limitation to the actual amount of gold you can store. Besides, you cannot take advantage of the price variation in gold. But with Gold funds, you do not have these problems. All that you have to do is buy units in a Gold fund and these units will be credited to your demat account. It is advisable to allocate 5-10% of your savings towards investing in gold, as it has been shown that after equity and property, investment in gold yields the most returns – around 7-8% over the long term.
What is the tax treatment?
Though Gold funds are similar to mutual funds, they are not treated at par with equity schemes. So you don’t enjoy the same tax-free treatment. Both short and long term capital gains tax, with indexation benefits, become payable.
Given a choice, would you invest in a Gold fund or would you prefer buying gold? How complicated is it to understand the working of a gold fund? Fill us in with some first-hand accounts.
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