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Should I invest in a gold FoF (fund of funds) through a monthly SIP to accumulate for my daughter's wedding?

Dhirendra Kumar discusses the utility of gold FoFs as a long-term investment option

What are gold FoFs? Can I invest in these funds through monthly SIPs with a long investment horizon? I want to accumulate for my daughter's marriage. Also, what will be the tax treatment of these funds?
- Raj

Broadly, there are two ways of buying gold. One is buying it in its purest physical form and the second is buying a gold ETF (exchange-traded fund). The process of buying a gold ETF is similar to buying a share in terms of having a demat account and instructing your broker. The price of gold ETF fluctuates with the rise and fall in the gold price.

Now, a gold fund of funds buys a gold ETF itself and you can buy it like a normal mutual fund. Thus, FoFs have higher expense ratios as they include the fees charged by underlying funds as well.

If you want to accumulate gold for your daughter's wedding, then in my opinion gold is not quite a good investment instrument. In the last ten years, gold has failed to impress in terms of returns. Whenever there is uncertainty in the market, the price of gold increases, leading to higher prices of gold ETFs. This is because they are considered to be a safe-haven asset. Such a situation happened in 2008 and somewhere around the time when gold derivatives were first launched. However, over a long period of time, it hasn't been able to provide inflation-beating returns.

If you want to buy gold at the time of your daughter's marriage, then you must start an SIP in an equity fund. With a horizon of 15-20 years, you will be able to accumulate enough to buy a much higher quantity of gold.