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.
Reasons to say YES to Gold
* The dollar is weak and getting weaker due to national economic policies which don’t appear to have an end.
* Gold price appreciation makes up for lost interest, especially in a bull market.
* The last four years are the beginning of a major bull move similar to the 70’s when gold moved from $38 to over $800.
* Central banks in several countries have stated their intent to increase their gold holdings instead of selling.
* All gold funds are in a long term uptrend with bullion, most recently setting new all-time highs.
* The trend of commodity prices to increase is relative to gold price increases.
* Worldwide gold production is not matching consumption. The price will go up with demand.
* Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.
* Several gold funds reached all-time highs in 2007 and are still trending upward.
* The short position held by hedged gold funds is being methodically reduced.
* U.S. government economic policies over the past decade have systematically projected the U.S. economy down a road with uncontrollable federal spending and an uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, such as gold.
* With the recent devaluation of many international currencies, the U.S. dollar was the international safe haven of last resort. We are seeing signs of this ending due to many financial factors, the most important one being a falling dollar.
* There are over One Trillion dollars ($1,500,000,000,000) of U.S. debt owned by foreigners which could be repatriated under certain conditions. This could cause a major decline in the value of the dollar and a soaring gold price.
* If you believe in ‘buy low, sell high’, gold is still low, but climbing.
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.