Should I Invest in Gold Mutual Funds? A Young Professional's Dilemma

Ans: Hi Gopal

A few observations, for the total amount of investment being made monthly, you don't need to invest in so many schemes. 1-2 schemes are enough, of which 1 can be ELSS if you have tax-saving requirements. The other can be a flexicap fund as your existing portfolio seems to be a mix of large, mid and small-cap funds.

Note (Disclaimer) - As a SEBI RIA, I cannot comment on specific schemes/funds that are provided or asked for in the questions in the platform. And the views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made and the answers here are for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the like and take professional investment advice before investing.

Ans: Investing in gold can be a valuable addition to your portfolio for diversification and wealth preservation. Let's explore the pros and cons of investing in gold bars/biscuits versus gold jewelry.

Acknowledging the Need for Diversification
It's great to see your interest in diversifying your investment portfolio at a young age, reflecting your commitment to financial stability and growth.

I understand the importance of exploring different investment options like gold to hedge against economic uncertainties and inflation.

Evaluating Gold Investment Options
Gold Bars/Biscuits: Investing in physical gold in the form of bars or biscuits offers liquidity and ease of storage. You can buy and sell gold bars/biscuits easily through authorized dealers or bullion exchanges.
Gold Jewelry: While gold jewelry has aesthetic value, it may not be the most efficient form of investment due to additional costs like making charges and potential loss of value due to fashion trends or wear and tear.
Advantages of Gold Bars/Biscuits
Purity and Value: Gold bars/biscuits are typically of high purity and standard weight, making them easily tradable and recognizable in the market.
Investment Focus: Investing in gold bars/biscuits allows you to focus solely on the investment aspect without being influenced by aesthetic preferences or fashion trends.
Disadvantages of Gold Jewelry
Additional Costs: Gold jewelry incurs additional costs like making charges, which can reduce your overall returns compared to investing in gold bars/biscuits.
Subject to Wear and Tear: Jewelry is susceptible to wear and tear over time, which may affect its resale value and add to maintenance costs.

While both options offer exposure to the gold market, investing in gold bars/biscuits is generally more conducive to investment purposes due to their purity, liquidity, and ease of storage. However, it's essential to consider your personal preferences and financial goals when making investment decisions.

Evaluating SGBs and Gold Funds
Sovereign Gold Bonds (SGBs): SGBs are government-backed securities denominated in grams of gold. They offer the combined benefits of gold investment and fixed interest income.
Gold Funds: Gold funds invest in a diversified portfolio of gold-related assets such as physical gold, gold ETFs, and mining stocks. They provide exposure to the gold market without the hassle of owning physical gold.
Advantages of SGBs
Safety and Security: SGBs are issued by the government, making them a safe and secure investment option compared to other forms of gold investment.
Interest Income: In addition to potential capital appreciation, SGBs offer a fixed interest rate on the invested amount, providing an additional source of income.
Advantages of Gold Funds
Professional Management: Gold funds are managed by experienced fund managers who make strategic investment decisions to maximize returns and mitigate risks.
Liquidity and Convenience: Investing in gold funds offers liquidity and convenience, allowing you to buy and sell units easily through the stock exchange.
Considerations for Investment
Risk Tolerance: Assess your risk tolerance and investment objectives to determine the most suitable gold investment option for your portfolio.
Diversification Benefits: Consider how adding SGBs or gold funds complements your existing investments and contributes to portfolio diversification.
Conclusion
By incorporating Sovereign Gold Bonds (SGBs) and Gold Funds into your investment strategy alongside physical gold, you can enhance portfolio diversification and capitalize on the potential benefits of investing in gold.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: It's commendable that you're planning for your retirement and considering various investment options. Given your current financial situation and goals, let's explore a comprehensive approach to achieving a corpus of Rs 1 crore in the next 11-15 years.

Understanding Your Current Financial Situation
Firstly, let’s summarize your current financial landscape:

Age: 40 years
Monthly Income: Rs 80,000 - Rs 1,20,000
Monthly Living Expenses: Rs 18,000 - Rs 20,000
Monthly Expenses for Parents: Rs 22,000
Current Investments:
Provident Fund (PF): Rs 3 lakh
Investment in Brother’s Company: Rs 16.4 lakh (2% monthly share)
Sovereign Gold Bond: 10 grams
Fixed Deposit (FD): Rs 4 lakh
Cash in Hand: Rs 1 lakh
No Debts or Credits
You have a stable income, modest expenses, and a few investments already in place. This is a solid foundation for building your retirement corpus.

Evaluating Your Investment Options
Provident Fund (PF)
Your PF of Rs 3 lakh is a secure investment with decent returns. It's typically advisable to retain PF due to its safety and guaranteed returns, which also enjoy tax benefits.

Investment in Brother’s Company
Your investment of Rs 16.4 lakh in your brother's company yields a 2% monthly share. This is quite beneficial as it provides a steady income stream. However, relying heavily on one investment can be risky.

Sovereign Gold Bond
Your investment in Sovereign Gold Bonds is wise as it offers both capital appreciation and interest. Gold can hedge against inflation and currency fluctuations.

Fixed Deposit (FD)
FDs are low-risk and provide assured returns but often lag behind inflation rates. Your Rs 4 lakh in FD ensures liquidity and safety.

Considering Mutual Funds for Wealth Creation
Benefits of Mutual Funds
Diversification: Mutual funds spread your investments across various assets, reducing risk.
Professional Management: Actively managed funds have professionals making investment decisions, aiming to outperform the market.
Flexibility: You can start with small amounts and increase your investment over time.
Tax Efficiency: Equity mutual funds held for more than one year benefit from favourable tax treatment.
Disadvantages of Direct Funds
Investing directly in funds requires extensive knowledge and time to monitor markets. Without professional guidance, you might miss crucial adjustments needed to optimize your portfolio. Investing through a certified financial planner ensures expert management and strategic adjustments.

Creating a Mutual Fund Investment Plan
Step 1: Set Clear Goals
Your goal is to accumulate Rs 1 crore in 11-15 years for retirement. This requires disciplined and strategic investing.

Step 2: Calculate the Required Monthly Investment
To achieve Rs 1 crore in 15 years with an average annual return of 12%, you need to invest around Rs 17,500 per month. For 11 years, this amount increases significantly due to the shorter time frame and the power of compounding. An investment calculator can provide precise figures based on varying returns and time frames.

Step 3: Start a Systematic Investment Plan (SIP)
A SIP in equity mutual funds is a prudent approach. It allows you to invest a fixed amount regularly, averaging out market volatility.

Evaluating Current Investments
Provident Fund
Consider retaining your PF. It offers safety, stable returns, and tax benefits. It's a foundational investment for retirement.

Investment in Brother's Company
This provides a 2% monthly return, equating to approximately Rs 32,800 per month on Rs 16.4 lakh. While profitable, it’s essential to diversify to mitigate risk.

Sovereign Gold Bond
Your gold bonds are valuable for diversification and as an inflation hedge. Hold onto them as part of a balanced portfolio.

Fixed Deposit
FDs offer liquidity and safety. Retain a portion for emergency funds but consider moving excess to higher-yielding investments.

Steps to Enhance Your Investment Strategy
Retain and Grow PF: Let your PF grow for guaranteed returns and tax benefits.

Diversify Beyond Family Business: While your brother's company investment is lucrative, avoid over-reliance. Allocate more to diversified mutual funds.

Maximize SIPs: Commit to a SIP amount aligned with your goals. Given your income, starting with Rs 17,500 - Rs 20,000 per month is feasible.

Emergency Fund in FD: Maintain a portion of your FD as an emergency fund. Redirect excess into equity mutual funds for better returns.

Professional Guidance: Engage a certified financial planner for tailored advice and active management of your portfolio.

Assessing Gold ETFs like GoldBees
Gold ETFs such as GoldBees are similar to sovereign gold bonds in providing exposure to gold without holding physical gold. However, they come with additional expenses like management fees. Sovereign Gold Bonds are generally more tax-efficient and offer interest. For long-term gold investment, continuing with Sovereign Gold Bonds might be preferable.

Crafting a Balanced Portfolio
Equity Mutual Funds
These should form the core of your investment for growth. Choose diversified, actively managed funds with a good track record.

Debt Mutual Funds
Allocate a portion to debt funds for stability and to balance the portfolio's risk.

Gold Investments
Continue holding your Sovereign Gold Bonds. They provide a safe hedge and some interest income.

Emergency Fund
Keep part of your FD for emergencies. This ensures liquidity and immediate availability of funds.

Detailed Financial Plan
Monthly Investments
Allocate Rs 17,500 - Rs 20,000 monthly into equity mutual funds via SIP. This targets your Rs 1 crore goal effectively over 11-15 years.

Lump Sum Investments
If considering moving funds from your FD or PF, do so thoughtfully. Lump sum investments can complement SIPs, but market timing risks must be managed.

Review and Rebalance
Regularly review your portfolio with a certified financial planner. Rebalancing ensures your investments align with changing market conditions and personal goals.

Final Insights
Building a retirement corpus of Rs 1 crore in 11-15 years is achievable with disciplined investing. Retaining your provident fund for its stability and tax benefits is advisable. Diversifying beyond your investment in your brother’s company will reduce risk and enhance returns.

Start a systematic investment plan (SIP) in equity mutual funds to harness the power of compounding. Maintain an emergency fund in fixed deposits for liquidity. Continuing with Sovereign Gold Bonds offers tax-efficient exposure to gold.

Regularly reviewing and rebalancing your portfolio with a certified financial planner ensures alignment with your goals. This approach maximizes returns and minimizes risks, leading you toward a secure retirement.

Your proactive approach to planning and willingness to invest in mutual funds is commendable. With a balanced strategy, you can confidently work towards your retirement goal.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You have shown good interest in disciplined investing.

Let’s now look at your gold investing methods in full detail.

We will compare Gold ETFs and Gold Mutual Funds.

Then we will assess your trading pattern in gold ETFs.

Gold ETF vs Gold Mutual Fund – Key Differences

Both invest in gold and track its price.

Both don’t involve physical gold handling.

But there are core differences between the two.

Gold ETF trades like a share on stock exchange.

Gold mutual fund is an open-ended fund.

You can invest without demat account in gold mutual fund.

You need demat account for Gold ETF.

Gold mutual fund invests in a gold ETF.

It adds a layer of fund management.

But also adds cost over ETF cost.

ETF price may differ from actual gold price due to market demand.

Mutual funds use NAV and update only once per day.

ETF can be bought or sold any time during trading hours.

Gold mutual fund can be bought anytime but based on NAV timing.

ETF needs stock exchange liquidity to sell.

Mutual fund has no liquidity issue, you can redeem anytime.

ETF cost is slightly lower.

But needs you to manage transactions and timing.

Mutual fund adds ease and automatic SIP option.

Gold ETF is suited for active users who track and trade.

Gold mutual fund suits long-term, disciplined investors.

Which to Choose – ETF or Mutual Fund

You said you don’t want physical gold. That’s clear.

You are using gold as investment and not for tradition.

In this case, both ETF and gold mutual fund are suitable.

But we must look at your goal.

If the idea is regular trading, then gold ETF fits better.

But if you want steady growth over time, prefer mutual fund.

Mutual fund lets you set up monthly SIP easily.

You don’t need to track or time prices.

It works on discipline, not emotion.

You also don’t need demat or trading account.

Mutual fund has full support of fund manager.

If invested through regular plan, you get help from MFD.

Certified Financial Planner can guide your gold exposure.

ETF may appear low cost, but without guidance it can hurt.

Most ETF investors buy high and sell low.

That’s the real cost, not just expense ratio.

Trading Method – Your 3% Rule Assessment

You said you track gold ETF.

When it goes over 3% of your investments, you sell.

You keep 1 unit to track price.

When price falls again, you re-enter.

This is a very tactical method.

You treat gold like equity.

You’re trying to use short-term timing to make profit.

But gold is not designed for short trades.

It doesn’t move fast like equity.

Gold gains are slow and steady over time.

If your goal is regular profit, gold is not the best tool.

Also, gold trading has tax impact.

Short-term gains in gold ETF are taxed at slab rate.

Long-term gains are also taxable based on new rules.

Frequent buying and selling reduces gains.

You also miss long-term compounding of gold.

Gold should be used as portfolio hedge.

Not as a frequent profit booking tool.

You should use equity for active trading, not gold.

Try to keep gold at 5-10% of your portfolio.

Let it stay as hedge and safety asset.

Use mutual funds for long-term gold exposure.

Use equity mutual funds or stocks for active return ideas.

Why Gold Mutual Funds are Better for Most Investors

No demat required. Easy to invest online or offline.

Easy SIP setup for disciplined investing.

No daily tracking needed.

Redemption process is simple.

Can invest even small amount monthly.

You also get regular statements.

You get help from MFD and CFP.

No liquidity issue. You get back money in 2–3 days.

You avoid emotional decisions.

ETF demands time and constant tracking.

Many investors get trapped in frequent ETF trades.

Mutual funds help avoid such habits.

How to Invest in Gold Mutual Fund Smartly

Choose regular plan through trusted MFD.

Prefer fund with consistent NAV tracking gold price.

Avoid new funds or NFOs.

Start SIP with Rs. 1,000 or Rs. 2,000 per month.

Target 5% to 10% allocation to gold.

Rebalance yearly based on goals.

Don’t panic if gold stays flat for some years.

It will work when equity is down.

That’s its real power – protection.

Don’t Treat Gold Like Equity Shares

Gold is not meant for fast growth.

It is not like large cap or midcap stock.

Gold is for stability and balance.

It protects in inflation, war, and currency crisis.

Equity builds wealth, gold guards wealth.

Use equity mutual funds for strong returns.

Use gold for slow, protective growth.

Avoid making frequent entries and exits.

Discipline matters more than timing.

MF CG Taxation Rules – Must Know

Gold funds are taxed as debt mutual funds.

Both short-term and long-term taxed as per your slab.

This reduces actual return if traded often.

So long holding is better to lower tax impact.

Avoid frequent switches to save on tax.

Sample Allocation Idea for Balanced Investing

70% in equity mutual funds (active, regular plan).

15% in debt mutual funds or PPF.

10% in gold mutual fund.

5% in liquid or emergency fund.

Review this mix yearly.

Use Certified Financial Planner for proper planning.

What You Can Do Next

Stop frequent gold ETF trading.

Treat gold as a support, not main growth engine.

Shift from ETF to gold mutual fund if long-term plan.

Start SIP in gold mutual fund through regular plan.

Avoid index gold funds. Use active fund house.

Don’t go for direct plan.

Direct plan saves little, but gives no support.

Without guidance, small mistakes cost more.

MFD with CFP support gives rebalancing and goal review.

Equity must be used for building wealth.

Gold should be used for diversifying risk.

Finally

Your interest in gold is good.

But treat it wisely with right plan.

Avoid trading too often for small gain.

Let gold protect your wealth, not replace equity.

Regular fund through CFP gives better outcome than ETF.

Stay invested with purpose, not emotion.

Let your portfolio work together, not in conflict.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment