On the occasion of Diwali, a five-day festival that starts with Dhanteras, people usually buy gold and silver to mark auspiciousness and attract blessings from Goddess Lakshmi. With changing times, gold and silver investment methods have also changed and people also consider gold mutual funds as a good option now. Investing in gold funds offers two advantages: first, you invest in gold while still maintaining tradition, and second, you don’t have to worry about storage or security because this investment is completely digital.
Different modes to invest in gold mutual funds — and how they differ
Before moving further, it’s important to understand the types of products available in the gold mutual fund category. Broadly, there are three routes — gold ETFs, gold funds and gold fund of funds (FoFs).
Gold ETFs invest directly in physical gold of 99.5% purity and are traded on stock exchanges, just like shares. They track real-time gold prices and offer high liquidity, but require a demat account.
Gold funds and gold fund of funds are ideal for investors who don’t have a demat account but still want to invest in gold digitally. These funds invest in gold ETFs and mirror their returns, though they may have slightly higher expense ratios.
Gold and silver ETFs returns in past one year
Over the past one year, gold ETFs have delivered returns of up to 65% and silver ETFs have given up to 82%, mirroring skyrocketing prices of the yellow metals in physical form. Physical gold and silver prices have seen a massive 69% and 75% rise. This surge in prices is the most talked-about among investors this Diwali. However, investors must remember that opportunities aren’t limited to only gold and silver and their ETFs, they also have other category fund options, such as equity, hybrid, or debt funds. But no matter which category you invest in, you must be aware of some common mistakes investors commit so that you stay away from those when investing this Diwali.
So, if you’re considering investing in mutual funds this Diwali, avoid these 5 costly mistakes:
1. Don’t invest based solely on past returns
Many investors invest in funds based on a fund’s past performance. But a fund that has excelled in the past year doesn’t necessarily continue to perform as well. Especially after the recent surge in gold and silver funds, it’s important to understand that prices will fluctuate. Therefore, before investing in any fund, understand its long-term strategy and risk profile.
2. Don’t rely on a single asset class
It is considered auspicious to invest in gold and silver on Diwali, but that doesn’t mean you should invest all your money in gold or silver funds. At any time, your portfolio should be a diversified one, maintaining a balance between different asset classes, such as equity, debt, and gold, in your portfolio. This reduces risk and ensures stable returns.
3. Don’t invest from a short-term perspective
Recent returns in gold funds have been excellent, but mutual funds should always be viewed from a long-term investment perspective. Many investors jump into bullish momentum and exit at minor dips. Doing so can result in missing out on good long-term returns. Therefore, invest with planning and over time.
4. Not choosing the right fund and the right SIP plan
Many people start SIPs in any fund without having a full knowledge of the product. Everyone’s risk tolerance is different. If you want less risk, gold ETFs or conservative hybrid funds may be good options. However, if your investment horizon is longer and you want higher returns, you can consider equity or multi-asset funds.
5. Ignoring taxes and expenses
When investing in mutual funds, it’s important to keep expense ratios and capital gains taxes in mind. Long-term capital gains tax and short-term capital gains tax on gold and silver funds are applicable, depending on the holding period. So, if you sell mutual fund units after 12 months of investment, you have to pay 12.5% LTCG tax, without indexation benefits. If sold in less than 12 months, STCG tax is applicable as per the slab rate of the individual.
The bottom line: Invest wisely, not in a hurry.
Diwali is a time for investments and new financial resolutions. If you’re thinking of investing in mutual funds, invest wisely. Gold and silver funds are currently in the news, but every investor’s needs and risk profile are different. Choose the right fund based on your needs, goals, and time horizon.
Remember, a good investment is one that gives you peace of mind, not the burden of uncertainty. Invest wisely this Diwali and further enhance your financial well-being.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.