Gold Fund (Definition) | How to Invest in Gold Funds?

What is Gold Fund?

Gold Fund are open ended mutual Funds or exchange traded funds that mimic the performance of real gold by investing in Gold companies that are into gold extraction or jewelry making. So instead of buying real gold, you can invest in such a fund and its prices will change as per the gold price in the market.

Purpose

Investment in real gold is risky as it requires storage and theft risk is also there. So if someone is planning to invest in Gold and still doesn’t want the risk exposure of storage they can easily buy Gold Fund. One of the most important drawbacks of investing in Real Gold is that when you try to sell it there is always an issue of impurity that the buyer subtracts from the gold price. So to eradicate the issue of storage and impurity one can easily bank on buying Gold Fund rather than buying real gold.
Small investments are not possible in real gold. Real Gold requires a certain amount that needs to be invested, say the smallest quantity that you can buy is 1 gram. So every month the price of 1 gram gold will change. It will be really difficult to do systematic investment if you are planning to buy real gold as the price of 1 gram gold will change every month. It will also be an issue to store such a small quantity of gold. So to avoid all the issues one can easily put Gold fund. It helps to invest equal amounts every month and also no storage factor is there.

How does Gold Funds work?

It operates just like other mutual funds. The steps are mentioned below:

Step 1: An Asset Management company selects a Fund Manager who will operate the gold Fund.

Step 2: Registration and licensing work with the government is performed by the Asset Management Company.

Step 3: Custodians, Transfer Agents and other parties required in the process are selected.

Step 4: Fund starts to advertise in the market and investors start to invest money.

Step 5: These are open-ended funds, so redemption and subscription to the fund directly can be done anytime.

Step 6: When the money is collected, the Fund Manager selects companies whose revenue is related to gold and also buys real Gold from the market.

Step 7: The price of the Gold Fund is the Net asset value per unit of the fund. The Net Asset Value is the Net Value that is left after the deduction of liabilities from the fund. If the Net Asset Value of the fund is $1 m and there are 100,000 units then the Net asset Value Per share is

= $ 1,000,000/ 100,000
= $10

So each unit can be bought by paying $10.

How to Invest in Gold Funds?

These units can be bought directly from the fund without any Demat Account. The units of the fund can be bought directly from the fund house. The price depends on the price of Gold and also on the price of the company’s stock that the fund invests. So the Net Asset Value per Unit changes every day. If one has to buy a unit then he will have to buy at the previous day’s NAV/Share. Once the buying order is placed. The Transfer agent of the fund will complete the legal work of the investor and will pass the buying order to the fund. Once the fund will process the order, they will allot units to the investor.
Systematic Investment is also possible where standing instructions are given that each month a certain amount of money will be deducted from the bank and will be transferred to the Fund House.

Advantages

These investments are safe as it is very risky to buy and hold real gold. Storage is an important issue for Real gold. Gold as a commodity is very precious and has a very high theft risk. Holding Gold Fund eliminates that risk
Gold is an important hedge against inflation. When prices of commodities start to increase, gold is the best hedger. Gold prices increase along with inflation. So if an investor wants to keep its purchasing power intact then he should invest in gold.
Gold is a very good diversifying agent. If you keep a portfolio of gold along with other equities then it will act as a diversifier. It means that when the prices of other equities will go down then the price of the fund will increase.
This fund is very liquid. So buying and selling is easier than actually buying and selling of real Gold.
Very small investments can be done which is not possible in the case of Real Gold. Real Gold will require a minimum investment which is quite high as compared to a minimum investment.

Disadvantages

Many times the investment is done by the portfolio manager is on foreign companies who are into gold extraction. So while converting the return earned from the investment in foreign countries, the currency exchange rate may go unfavorable. This will deplete the actual return earned.
If there is any issue in the particular company and the price of the company falls where the portfolio manager has invested then the return from the fund will fall.

Conclusion

Gold Fund is very important as it reflects the true picture of the commodity gold. If someone wants to gain exposure in Gold and still doesn’t want to take the risk of losing the commodity then he should blindly invest in this. It is a good diversifier and should be taken as an alternative to buying gold.