Updated July 17, 2023
What is Gold Fund?
The term “gold fund” refers to the investment fund that purely invests in gold and other related assets. Some of the most common types of gold funds invest directly into physical gold bullion or purchase gold futures contracts or stocks in gold mining companies.
Exchange-traded funds (ETFs) or open-ended mutual funds replicate the performance of real gold, making these funds available.
Explanation of Gold Fund
The gold fund is only an indirect purchase of gold assets instead of a direct purchase of real gold. The movement in the value of these funds is directly linked to the gold price in the global market. These funds are more popular among investors who use them to hedge against inflation risks and are particularly bullish about the future of gold.
Purpose of Gold Fund
The two major reasons for investing in gold funds instead of real gold are as follows:
- Some investors find investment in real gold risky as physical storage exposes them to theft. So, with the gold fund, one can invest in gold without physical storage.
- It aids the planning of a systematic investment strategy, unlike real gold. The price of gold changes every month, which means buying a fixed amount of physical gold (say 1 gm) will require a different amount of money every month. On the other hand, a gold fund allows investors to put in an equal amount of money every month.
How Does Gold Fund Work?
To invest in a gold fund, one needs to understand how exactly it works. So, let us look at the steps below:
- Step 1: The Asset Management Company (AMC) has to select a suitable fund manager responsible for managing them.
- Step 2: The AMC has to complete the registration and get the license.
- Step 3: The AMC has to hire a transfer agent and custodian to maintain the fund transactions.
- Step 4: Start marketing and advertising to inform prospective investors and the market about the new fund.
- Step 5: These open-ended funds allow for easy purchase and redemption, enabling investors to execute transactions anytime.
- Step 6: After raising money from interested investors, the fund manager invests in gold processing companies and purchases real gold from the market.
- Step 7: The net asset value (NAV) per unit determines the price of a gold fund, similar to other mutual funds. The NAV calculates the net value by deducting the fund’s liabilities from the invested amount, giving it its name.
Examples of Gold Fund
The following are examples of some of the best global gold funds available in the world:
- Invesco DB Precious Metals (DBP): The fund was started in January 2007; as of September 09, 2020, its total asset stands at $174.7 million. During the last 3 years/5 years/ 10 years, the fund has generated return of 11.75%/10.66%/ 2.74%, which indicates that its performance has improved significantly during the last 5 years resulting in healthy returns. The expense ratio of the fund is 0.75%.
- SPDR Gold MiniShares (GLDM): The fund was started in June 2018, and as of September 09, 2020, its total asset stands at $3.5 billion. During 2019, its first year of operation, the fund generated a healthy return of 18.62%. The expense ratio of the fund is 0.18%.
- Aberdeen Standard Gold ETF (SGOL): The fund was started in September 2009; as of September 09, 2020, its total asset stands at $2.8 billion. During the last 3 years/ 5 years/ 10 years, the fund has generated a return of 12.80%/ 11.55%/ 4.12% which indicates an improvement in performance in the last 5 years. The expense ratio of the fund is 0.17%.
Who Should Invest in Gold Fund?
Investment in gold funds is best suited for the following:
- Investors who seek to diversify their investment portfolio to reduce investment risk at the portfolio level. The regulatory authorities closely monitor these funds.
- Conservative investors want to invest in an asset indifferent to market fluctuations. Indirect investment in gold bullion through gold funds is the perfect hedge against a volatile market.
Advantages
- Investments in gold funds don’t require any physical storage, making it far less risky than holding real gold. As a commodity, gold is one of the very precious metals, so it is always exposed to theft. However, a gold fund eliminates this risk completely.
- Gold investment acts as a hedge against inflation. Basically, the price of gold invariably increases in line with inflation, which means that the purchasing power of the investors never deteriorates.
- It is very useful for diversifying investment portfolios as most investors resort to gold investment as a flight to safety. Hence, the value of gold investment remains stable in a volatile market condition.
- It is more liquid than real gold as their purchase and redemption are much easier than real gold.
Disadvantages
- Gold funds are more expensive than investing in real gold due to the inclusion of various charges, such as management fees, brokerage, demat charges, etc. All these charges result in a lower return on investment.
- As an investment, a gold fund doesn’t generate any regular income.
Conclusion
So, it can be seen that a gold fund is a very important financial instrument that can be used to invest in a gold asset without actually buying real gold. But one should understand the benefits and the costs associated with the investment in it before putting money in it.
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