Mutual Funds offer an easy way to mine gold and silver without physically owning them. From ETFs and funds of funds that track bullion to multi-asset allocation funds mixing metals, stocks and debt, here’s how to invest, what to look out for and the tax rules that apply.
HOW CAN INVESTORS BET ON GOLD AND SILVER THROUGH MUTUAL FUNDS?
Investors can gain exposure to these metals through exchange-traded funds (ETFs) or funds of funds (FoFs) offered by asset managers. When you invest, you receive shares based on the net asset value (NAV) of the scheme. These systems hold physical gold or silver bars, so the NAV moves with the price of the metal, giving you indirect ownership without owning the metal.
ARE THERE OTHER MUTUAL FUND OPTIONS FOR INVESTING IN GOLD AND SILVER?
In addition to ETFs and FoFs, several fund companies offer multi-asset allocation funds that typically invest between 10 and 25% in gold and silver. Multi-asset allocation funds provide investors with indirect exposure to gold and silver as well as stocks and debt, providing diversification and automatic rebalancing. However, allocations to precious metals are capped at between 10% and 25%, limiting returns during sharp rises in gold or silver.
CAN WE INVEST SYSTEMATICALLY THROUGH THESE GOLD AND SILVER MFS?
Investors can choose Systematic Investment Plans (SIP), Systematic Transfer Plans (STP), in addition to lump sum investments. There is no upper limit to the amount you can invest in these metals through mutual funds.
WHAT IS THE TAX TREATMENT OF GOLD AND SILVER FUNDS?
For gold or silver ETFs, gains from units sold within 12 months are treated as short-term capital gains and taxed according to your income bracket. Shares held for more than 12 months are subject to long-term capital gains tax at a rate of 12.5%. For FoFs, holdings beyond 24 months are taxed at 12.5%, while those sold earlier are taxed based on your slab.
WHAT APPROACH SHOULD INVESTORS TAKE TO GOLD AND SILVER AFTER THE STRONG RALLY?
Financial planners recommend a buy-on-the-dip strategy rather than lump sum purchases. They advise against chasing past returns and suggest limiting exposure to 10-15% of your overall portfolio: around 10% to gold to protect the portfolio in case of market stress or geopolitical risks, and 3-5% to silver as a tactical bet given its higher volatility. In rupees, gold has returned 73% over the past year, while silver has gained 161%. Over three years, gold generated an annualized return of 32.98% and silver 48.77%. Build this allocation gradually over six months via SIPs, STPs or staged purchases during price corrections.
