Wait,wait,wait....Before we get our eyes blinded by all the gold that we are about to see in gold mutual funds, let’s get to the ground and recap what mutual funds are.

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What is a mutual fund?

Let’s understand with an example. Suppose you want to invest in mutual funds. You(investor) invest, meaning you give a certain amount to a person who is a finance professional(fund manager).

There are hundreds of people like you who would do the same. The fund manager collects all the money you and others invested and would then purchase securities such as stocks and bonds that are in line with the investment mandate.

You(investor) would be allocated with fund units based on the amount you invest. Each investor would hence experience profits or losses that are directly proportional to the amount they invest. Simple.

Now let’s learn about gold mutual funds

Gold funds are a type of mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates(a group of individuals or organizations combined to promote some common interest), physical gold, and on stocks of mining companies. It is a convenient way to invest in an asset without having to purchase the commodity in its physical form.

What’s the purpose of Gold Mutual Funds?

One of the important purposes is to be used as a hedge to protect an investor against economic shock. The primary purpose of these types of investments is to create wealth during investment tenure and protect you against market collapse. Due to gold’s varying prices, the performance of its underlying stocks often vary greatly; for example, even a tiny change in gold’s global market price can cause considerable alterations in its stock’s return.

Taxability

Taxation of gold mutual funds India is similar to taxes imposed on gold jewellery. Taxes are also levied depending on the investment tenure; if the date of investment and date of redemption is less than three years, it is considered as a short-term investment. In this case, the revenue is added to the investor’s gross income to calculate tax. If the tenure is longer than three years, its returns are considered as long-term investment and are taxed at 20% along with indexation standard.

The Income Tax Department of India does not impose any Tax Deducted at Source at the time of maturity or trading of gold mutual funds.

Well, now you must have gained a lot of knowledge about the gold mutual funds. But are they worth investing? What are the advantages? We will get to know about all this in the next blog.