Gold mutual funds: Types and benefits

Gold has always been one of the preferred investment options of investors, particularly in India as it holds great value in terms of monetary and culture. It is a symbol of status in Indian society. Investment in gold can be done in many ways. For example, traditionally it was purchased in form of jewelry or gold bars. But as the world is changing, so does the investment avenues. There are many new options that have emerged like gold ETF, gold funds, sovereign gold bond scheme, etc. in which investors like to invest.

In this article, we are going to talk about gold funds or gold mutual funds, its types and benefits, etc.

So let’s start with the meaning of gold mutual fund

What do you mean by gold Mutual fund?

A gold mutual fund is a type of mutual fund that demands investment in various forms of gold, as the name suggests. The investment in these funds generally made on physical gold and on stocks of mining companies and stocks of gold producing and distributing syndicates providing an alternative of physical gold investment to investors. The main objective of these types of funds is to provide a cushion against market collapses.

Types of Gold Mutual Funds:

There are three types of gold funds:

Gold mining funds: gold mining funds are the types of gold funds that invest in gold mining companies. The return of these funds is dependent on the performance of the mining companies.

Gold ETF:  Gold ETF or Gold Exchange Trade Funds are those funds that have gold as their underlying asset. They closely track the performance of domestic prices of gold.

Gold fund of funds: Gold FoF or gold Fund of Fund are those funds that invest in units of gold ETF.

Advantages of investing in Gold Mutual funds

There are many advantages of investing in gold mutual funds that you get when you invest in gold mutual funds.

Some of the major advantages are discussed below:

• The first and foremost advantage of gold fund investment is that there is no issue of storage that always happens when you purchase physical gold. The investments are in electronic form so there is no concern about the storage of the gold. This makes it one of the safest alternatives to physical gold.
• Second, investing in gold mutual funds make your portfolio more diversified and reduce your risk. That makes it a good option for investors looking for low-risk investments.
• Third, there is no need for you to have a Demat account to invest in gold mutual funds. So you can make an investment through a mutual fund advisor with a nominal account.
• Fourth, there is a great advantage of liquidity that you can avail when you invest in gold mutual funds rather than physical gold. You can sell or redeem your funds easily.
• Fifth, investment in gold mutual funds are cost-effective in comparison to physical gold. Gold mutual funds provide great flexibility to their investors. The investors can also invest in gold mutual funds with SIP (systematic Investment Plan). Thus providing small investors the advantage to invest in gold mutual funds and avail the benefits of diversification and reduce their risk.
• Last but not the least, this advantage is important which gets ignored sometimes by the investors that investment in gold mutual funds provides protection during the period of inflation.

Risk on investing in Gold Mutual Funds

Since you are now aware of the advantages of Gold Mutual funds now it’s time to see what are the risks involved in it. Because before making any investment you should consider the risk associated with it and compare it with your risk-taking capacity. So let’s start-

Fluctuation in value of the gold:

One thing that you need to consider that the value of the gold may change. The value of gold is affected by demand and supply, which leads to rising or fall in the value of the gold. The prices are very seasonal in nature. Thus gold involves high volatility. That’s why it is advised by many investment experts to not view gold as an investment option but as a hedge.

No Guarantee of Exceptional return

It is pretty clear from the point that gold should not be considered as a long-term option for wealth creation. The return from gold mutual funds may not be higher like equities. The performance of the gold is well during the market crisis. Thus providing an alternative option in time of market turmoil.

Things you need to consider while investing in Gold Mutual Funds:

• The returns from Gold Mutual Funds may not provide good returns like equities.
• Investment in gold shows seasonal trends. Investment in gold shows good returns during market crises.
• Before investing you need to check or track the trend that is prevailing. That can help you get the idea of the performance of the asset class.
• Investment in Gold mutual funds matches your financial goal and risk appetite.

Happy investing!

Disclaimer: Take advice from your financial advisor before investing.