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Gold Fund

Updated on April 11, 2024
Article bySourav Sinha
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Gold Fund?

Gold Funds 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.

Gold-Fund

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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.

Key Takeaways

  • Gold funds are open-ended mutual funds or exchange-traded funds (ETFs) that aim to replicate the performance of physical gold by investing in companies engaged in gold extraction or jewelry production.
  • By investing in a gold fund, you can gain exposure to the price movement of gold without physically owning the precious metal. The fund’s value will fluctuate with the prevailing gold price in the market.
  • Investing in gold requires a minimum investment, as the smallest quantity that can be purchased is usually one gram. 

How Do Gold Funds Work?

The Gold Fund is critical as it reflects the real picture of 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.

One of the most significant 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 problem 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 of gold will change. It will be tough to make a systematic investment if you plan to buy real gold, as 1 gram of gold will change every month. It will also be an issue to store such a small quantity of gold. So to avoid all the problems, one can quickly put the Gold fund. It helps to invest equal amounts every month, and also no storage factor is there.

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

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Steps

Step 1

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

Step 2

The Asset Management Company performs registration and licensing work with the government.

Step 3

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

Step 4

The fund starts to advertise in the market, and investors begin 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 buys real gold from the market.

Example

The price of the Gold Fund is the Net asset value per unit of the fund. The Net Asset Value is the net value 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?

  • These units can be bought directly from the fund without any Demat Account. The units of the fund can be purchased directly from the fund house. The price depends on the price of gold and also on the cost of the company’s stock that the fund invests in. So the Net Asset Value per Unit changes every day. If one has to buy a unit, they 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 processes 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 transferred to the Fund House.

Advantages

  • These investments are safe, as it is hazardous to buy and hold real gold. Storage is an essential issue for Real gold. Gold as a commodity is very precious and has a very high theft risk. Keeping the Gold Fund eliminates that risk
  • Gold is an essential hedge hedge against inflation. When prices of commodities start to increase, gold is the best hedger. Gold prices rise 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 go down, then the cost of the fund will increase.
  • This fund is very liquid. So buying and selling is more comfortable than actually buying and selling real gold.
  • Minimal investments can be made, which is not possible in the case of Real Gold. Real gold will require a minimum investment, which is relatively high as compared to a minimum investment.

Disadvantages

  • Many times the investment made 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 made.
  • 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 decline.

Gold Fund Vs Gold ETF

Both gold funds and gold Exchange-Traded Funds (ETF) provide significant ways of investing in gold. While investing in these options offers investors an opportunity to have diversified portfolios, they have a few restrictions as well, which one must be aware of:

  • Investing in a gold fund does involve many restrictions; whereas investing in gold ETFs binds investors to spend on a certain minimum unit.
  • Investing in gold ETFs involves having a DEMAT account and a broker as the deal occurs on a stock exchange. On the other hand, gold fund investment can occur even if an investor does not have a DEMAT account.
  • The costs involved in investing in both options vary widely.
  • Gold ETFs are less liquid than gold fund investments.

Frequently Asked Questions (FAQs)

1. What is a gold fund SIP?

A gold fund SIP refers to a Systematic Investment Plan in a gold mutual fund. It allows investors to regularly invest a fixed amount in a gold fund at predetermined intervals, such as monthly or quarterly. This systematic approach helps in averaging the cost of investment and potentially mitigating the impact of short-term fluctuations in the gold market.

2. Which is better, FD or gold mutual fund?

The choice between fixed deposits (FDs) and gold mutual funds depends on various factors, including financial goals, risk tolerance, and investment time horizon. FDs offer fixed returns but generally have a lower potential for growth. Gold mutual funds, on the other hand, are linked to the performance of gold and can provide capital appreciation. However, they also carry market risks.

3. Is a gold fund risky?

Gold funds, like any investment, carry a certain level of risk. Fluctuations influence the value of a gold fund in the gold market. While gold is generally considered a relatively stable investment, factors such as market volatility, geopolitical events, and economic conditions can impact its price. Investors need to assess their risk tolerance and diversify their investment portfolio to manage potential risks associated with gold funds.

This has been a guide to what is Gold Fund. We explain its differences with gold ETF, how they work along with suitable examples, advantages & disadvantages. You can learn more about financing from the following articles –