Gold Guide: Investing in Gold Mutual Funds

by | Oct 7, 2020

When it comes to investments, gold has a reputation for being a valuable, reliable, and vital component of the financial portfolio. While there are many ways to invest in gold, including gold coins and gold IRAs, gold mutual funds are growing in popularity. The exchange costs related to gold ETFs are frequently lower than the costs of purchasing, storing, and insuring physical gold.

What Are Gold Mutual Funds and How Do They Work?

Gold funds that invest in Gold ETF or Exchange-Traded Funds are also known as gold mutual funds. Gold ETFs are passive investment instruments that rely on gold prices and usually invest in gold bullion. Having an investment in gold mutual funds provides indirect exposure to gold investments in an online form; therefore, investors can reap similar benefits, as if they were investing in physical gold.

Mutual fund investments are popular among individual investors because of the perks they offer. You can start with any amount, diversify across multiple stocks or instruments, or allow automated monthly investments. When you invest in gold mutual funds, the house uses your investment to buy gold bullion and then allocates your share to your portfolio. When the prices of gold rise, your ROI grows as well.

What Is NAV (Net Asset Value), and How Is It Estimated for Gold Funds?

When it comes to mutual funds, NAV is an essential element you should be aware of. Net Asset Value is defined as the net value per unit and is calculated as the total value of the asset minus the liabilities’ value. In other words, NAV represents the unit price/per share of the gold mutual fund.

The formula for estimating NAV is pretty simple: NAV= Assets-Liabilities/Total number of shares.

How to Invest in Mutual Gold Funds: What to Consider Before Investing

Investing in mutual gold funds is as easy as investing in any other funds. The easiest way to invest is through a mutual fund provider.

Here are some things to consider as an individual investor before deciding to invest in mutual funds.

  • Seasonal behavior: The performance of gold varies due to seasonal circumstances. For example, during a market crisis, gold earns high returns; in a stable market situation, it decreases in value.
  • Lower returns: Gold investments provide lower but stable returns, unlike equities, which provide high returns but are not as stable as gold. Investing in gold mutual funds make sense during market crises. Once the market stabilizes, some investors choose to move their investments to riskier options.
  • Diversification: If you are looking to diversify your small or medium-sized portfolio, gold mutual funds may not be the ideal investment option for you. Compared to other assets, gold earns low returns, and for those looking to diversify portfolios, it won’t seem like an attractive option. However, if you don’t mind low but stable returns and are flexible when it comes to your investment goals, gold mutual funds might be an interesting choice to consider. It is also a good choice for investors with large portfolios.
  • Dynamic allocation: Increasing gold investment during market crises is crucial for earning high returns. As the market starts returning to normal, investments moved to other assets have a better chance to earn higher returns.
  • Follow the trends: Predicting what will happen in the future and deciding how to play your cards right is impossible, even if you have previous experience investing in gold mining stocks, bullions, or coins for years. No one knows what will happen in one month or one year. However, tracking the performance, following the price fluctuations, and keeping up with the trends will give you rough guidance to decide where and how much you want to invest. After all, investing in gold mutual funds seems like the most harmless option of them all.

What Elements Affect Your Returns in Gold Mutual Funds?

gold mutual funds value
Some elements can significantly affect your returns in gold mutual funds. The following are some of the most important ones.

Value of Gold

Gold is traded every day on various commodities exchanges. Since trading depends on supply and demand, it leads to price deviations. The value of gold may increase or decrease at any given moment, and this impacts the funds. Due to these fluctuations, gold funds are exposed to risk and unpredictable changes.

Currency Exchange

Mutual gold funds undergo fluctuations in the currency exchange rate (especially international funds). When you invest in foreign currency, any fluctuation in the exchange rate could impact your return.

Asset Class

The asset class risk mainly impacts gold funds that invest in gold mining shares or distribution companies. If there are any changes in regulations, laws, or political factors, they could impact the gold industry, i.e., your fund, regardless of the company or mining share in which you’ve invested. Investors call it the industry-specific risk and is something you can’t ignore, especially when increasing your fund’s investments.

Individual Stock

If a gold mining company undergoes certain changes — for example, management decisions, lawsuits, or financial loss — it creates red flags you shouldn’t ignore. These changes may have a significant impact on the company’s stock value and mutual fund performance.

What Are the Advantages of Investing in Mutual Gold Funds?

Many mutual funds offer gold investment opportunities as part of their portfolio services. However, some focus only on gold investments. Regardless of the mutual fund you decide to invest in, gold investments bring certain benefits, including minimal investment requirements, simple ownership, diversification among different companies, and no need to do additional research.

Let’s talk more about the perks of investing in gold funds.

Transparency

Gold prices are updated every day on the stock exchange, and everyone has access to the current price. Easy and global access makes the process transparent for everyone who’s investing in precious metals.

Safe Investment

Compared to other assets and precious metals, gold is an overall safe investment because gold can resist market crises and rise above the crashes.

Confronts Inflation

After a market crisis, inflation follows. While inflation is scary for other assets, currencies, and precious metals, gold seems to remain intact. During inflation, gold prices are still stable, making it a perfect investment option.

Diversification

For investors looking for low-risk and low-return investments, gold mutual funds are ideal for diversification. For investors interested in expanding their portfolio and considering high-risk, high-reward options, gold funds might not be the best choice.

No Dematerialized (Demat) Account Requirements

Gold mutual funds allow investors to invest with a minimal amount. For this reason, a demat account is not obligatory; instead, investors can make investments through mutual fund providers.

SIP – Systematic Investment Plan

Another benefit of investing in gold mutual funds is that you don’t need to research investment rules, trends, or amounts (unless you are planning more investments and want to be informed about the details).

With gold funds, you can invest small amounts in a disciplined pattern and not worry about market timing. It is ideal for newcomers who want to invest in gold but don’t have enough experience to make investments independently, create individual portfolios, or develop strategies.

Cost-Effective

It is convenient for small or beginner investors to invest in gold funds with SIP because it doesn’t require additional research and accepts minimal investments. Besides, there are no extra expenses, such as dematerialized accounts, annual maintenance charges, transaction fees, brokerage fees, or delivery fees, making this option attractive and cost-effective.

Liquidity

Liquidity may be an issue when you invest in physical gold. However, when investing in gold funds, you can recover possession every day.

Expenses and Taxation

Mutual gold funds invest in gold ETFs. The final cost of ETFs is calculated and added to the mutual fund. Funds also charge investors with an exit penalty if they decide to break off the deal before the predetermined lock-in period.

In terms of taxation, gains on funds are taxed based on the investment’s holding period. If your investment is held for less than three years, they are taxed at the income tax slab rate of the investor. If it is held more, they are taxed at 20.8%.

A Final Word

Investing in gold mutual funds is a smart way to take advantage of the value of gold and stable market prices. However, you must understand the risks of investing in precious metals and that no one can guarantee returns on investment.

Our advice is to get familiar with gold investments: discover gold futures and options and make a well-informed decision about what’s right for you and your financial goals.

Gold offers numerous investment options, and no one can stop you from exploring them all. If you want to learn more about building wealth through gold investments, don’t forget to check out some of our investing articles and step-by-step guides.

If you are wonder where to begin with your next gold investment, we got you covered. We can match you with a professional Gold IRA Partner who can assist you with your first successful gold investment.

Contact us today for more information.

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