Gold Funds – An Alternative to Beat The Market Volatility

The stock markets across the world has been volatile in the last few months. The MSCI world stock index hit an eight-month low in October. The Chinese economy shows signs of weakening. The stock market in Australia is weak and the Nikkei (index of the Tokyo stock exchange) has been falling in October.

In India too, the stock markets are volatile. The Sensex has lost about 4000 points between August 2018 and October 2018.

How does a retail investor protect himself from this volatility? He should diversify his investment portfolio. He can consider gold as an alternate investment. If buying physical gold is not appealing to him, he can invest in Gold Funds or Gold ETFs.

Gold ETFs – Gold ETFs are mutual funds that invest in gold. They trade in gold to optimize returns. Retail investors can invest in Gold ETFs vis-a-vis their demat account.

Gold Funds – Gold Funds are mutual funds that invest mostly in Gold ETFs and some other related assets.

Differences between Gold Funds and Gold ETFs

·       The underlying asset in Gold ETFs is gold whereas for Gold funds, it is Gold ETFs.

·       Gold ETFs are traded on the stock exchange. Gold funds can be purchased from the Mutual Fund house.

·       Gold Funds have the option of SIPs but in case of Gold ETFs there is no direct method of SIP. As an investor, you need to go to your trading account and explicitly buy at regular intervals to follow the SIP mode of investment.

·       Gold funds have higher expense ratio as they are managed by MF managers.

·       In Gold ETFs, you have to buy approximately equivalent to the value of 1 gm of gold. If you are investing today, it would be around Rs. 3,200-Rs. 3,300. Gold funds have a minimum investment amount between Rs. 1000- Rs. 5000

·       Investments in Gold ETFs and Gold funds are considered as non-equity investments. Short-term capital gains are added to investor's income and taxed as per the relevant tax slab rate. Long term capital gains are taxed at 20% after providing for indexation.

Where do Gold Funds score over Gold ETFs

·       Gold funds are more advantageous over Gold ETFs as you can invest using the SIP mode. You can invest small sums over a period of time in a disciplined manner.

·       Golds funds are handled by fund managers who have the relevant professional expertise.

·       Gold funds do not require demat accounts. You can invest in them through the Mutual Fund house.

·       When you invest in a Gold ETF, you invest in gold. When you invest in Gold funds, you invest in the best Gold ETFs. A good fund manager will protect the investment from volatility and optimise returns.

Here are examples of some Gold Funds (only for reference)-

Scheme Name	NAV ₹ (as on 12th October)	1 year returns (%)	3 year returns (%)
SBI Gold Fund Growth (G)	10.04	4.5	4.5
Reliance Gold Savings Fund (G)	13.32	3.7	4.3
Kotak Gold Fund	13.22	4.8	4.5

(Returns are annualised)

Gold is a good asset to invest in to offset the risks in other investments. It is not easy to store physical gold. So Gold funds are a great option for investments in gold.