Gold has been held in very high regard by Indians for centuries now. We believe it has the ability to purify almost everything it touches. Further, gold is a symbol of prosperity and power. However, today it is much more than a status symbol, it is a good investment option that is a safe haven during times of economic uncertainty. However, investing in physical gold might not give you the kind of returns you are looking for. Plus, you need to store it safely. This is where gold mutual funds come to the rescue. They have historically offered average returns of 26.84% and topped the return charts with 11% in the March quarter of 2020 alone.
They continue to be a sought-after investment choice in 2021 due to the continuing uncertainty in the global markets. These funds are not just easy to obtain, they can be liquidated at short notice. Further, there is usually no security transaction or wealth tax on them. Take a look at a few more things to know before investing in these funds.
1. Non-Exceptional Returns
This might come as a surprise, since gold provides high returns during uncertain times. This is because it is a safe haven asset. When other financial instruments underperform, people tend to flock to gold, which raises its price. However, these funds have a long-term investment horizon, so be patient. You could consider these funds as making up about 5%-10% of your total portfolio. You can also check out how to start an SIP investment in these funds, for greater convenience and flexibility.
2. Limit Your Allocation
Indians have an age-old weakness for the precious yellow metal. However, make sure to control your exposure to ensure appropriate backup during emergencies and satisfactory overall returns in future. Use gold to diversify your portfolio instead of using it as a tool for wealth creation. Further, if you have high risk appetite, consider bonds and stocks for high returns. This will balance out your portfolio too.
Short term gains are added to your existing income and taxed as per the slab. Long term gains are taxed at 20%, post indexation. However, any return after 8 years of having invested in sovereign gold bonds is entirely tax free.
4. Purity is Crucial
It is hard to understand the exact purity of physical gold. In fact, the ways to do so are not readily available to the common investor. You might also have to consider hallmarked jewellery and the making charges added to the cost. But, only those with the highest purity, say 99.5%, are picked for investment in gold mutual funds. Therefore, rest assured that the precious commodity you are purchasing is genuine and pure.
5. Seasonal Response
As far as performance is concerned, gold is not known for its consistency. Instead, it might give you unexpectedly high returns during a crisis. The rest of the times, gold might be lagging other riskier assets. Therefore, it is advisable to use it for portfolio diversification and spread the overall risks, while increasing the chances of steady gains.
In a nutshell, gold mutual funds can make portfolios more efficient. Get in touch with your financial advisor to make the most of the yellow metal.