InvestorQ : What are gold mutual funds and how to invest in these gold mutual funds?
Rutuja Nigam made post

What are gold mutual funds and how to invest in these gold mutual funds?

user profile image
Arti Chavan answered.
1 year ago

When it comes to the world of investments, gold is considered a reliable, valuable, and essential part of one’s financial portfolio. Over the years, many modern ways of investing in gold have come to the fore. Here we look at one such option: gold funds. Let us understand what a gold fund is all about? These gold funds are mutual funds that invest directly in gold (both in India and international markets). Some gold funds also invest in the shares of gold mining and distribution companies. Some funds also invest in Gold ETFs. These are usually called gold ‘Fund of Funds’. Here is how they work. The fund house collects money from thousands of investors like you and me. It then uses this pool of money to buy gold or shares of gold mining and distribution companies. The fund then issues ‘units’ to the investors. Each Gold Fund unit is equal in value. This value is dependent on the value of gold or the share price of the companies invested in. This value is called the Net Asset Value (NAV). If the NAV of the Gold Fund increases, your investments grow in value.

Let us dwell for a moment on how this Net Asset Value calculated for gold funds? When it comes to gold funds, Net Asset Value (NAV) is an important concept you should be aware of. NAV is defined as the fund’s market value per unit. Simply tally the value of all the assets the fund has invested in. For example, let’s say the Gold Fund invested in gold worth Rs 10 crore. Then, divide this amount by the total number of ‘Units’ issued by the fund. Let’s say the fund issued 10 lakh units. Then the NAV of the fund would be Rs. 100. So, if an investor holds 10 units of the Gold Fund, then the investor holds gold worth Rs. 1,000 (Rs. 100 x 10). This NAV gets updated every day. However, unlike the share price of a stock which is updated intra-day, the NAV of a mutual fund is updated only at the end of the trading day . So, if you buy 1,000 units of a fund today before market close, you are essentially buying at yesterday’s closing price. However, the daily dip or rise in NAV should not matter very much. Experts advise investors to look at the year-on-year returns of the fund to judge its performance. Let us now turn to the execution side of it.

How to invest in gold funds? Investing in gold funds is as easy as investing in mutual funds. One reason is because unlike gold ETFs, you do not need a demat account to invest in gold funds. Plus, you can break the entire investment amount into monthly investments through a Systematic Investment Plan (SIP). This way, you can benefit from rupee cost averaging. What affects your returns in gold funds? Changes in the value of gold are a key factor. Gold is traded every working day on different commodities exchanges like MCX. Since trading is based on the principle of demand and supply, it leads to fluctuations in prices. Hence, the value of gold can rise or fall on any given day and this directly impacts gold mining companies. Thus, their stock value changes too. Due to this, Gold Funds could be exposed to risk due to the changes in the value of gold. The same applies to gold funds that invest in bullion.

Are there any risks in these gold mutual funds? Yes, there are asset class risks. This is mainly for gold funds that invest in the shares of gold mining or distribution companies. Any change in laws, regulations or eco-political factors could affect the entire gold industry, regardless of which company you have invested in. This, though, could affect the value of the shares and, thus, your gold fund. This is also known as industry-specific risk. Then there are some additional risks to be conscious about. For example, currency exchange risk is there on gold funds, especially those dealing internationally, can be exposed to the fluctuations of the rupee exchange rate. After all, when you deal in foreign currency, any change in the exchange rate could affect your transaction value. Then there is the individual stock risk which is directly related to specific companies. In case a gold mining company underperforms or it has an issue with lawsuits or management decisions, the company could face trouble. This will have an adverse impact on the company’s stock price and your Fund’s performance. However, the inherent diversification of a mutual fund lowers this risk.

So, why should I go about investing in gold funds in the first place? One of the most important aspects of gold funds is that it is an electronic investment so there are no storage charges involved as is the case with physical gold. Secondly, it is about disciplined investing.

By investing through SIPs, you can structure your investments in gold funds. You do not need large sums of money to start investing. You can start your investment journey with even Rs 100 per month. As your income increases, you could consider increasing the investment amount. Thirdly, you can allocate in small amounts. When buying physical gold, it may not always be possible to buy less than 1 gram at a time, that costs say Rs 500 or Rs 1,000. Gold funds make this possible for you. Fourthly, gold mutual funds give you the benefit of diversification. A common thumb rule of investing is to avoid “putting all the eggs in a one basket”. When you invest in a gold fund, you get exposure to a variety of gold companies. This has the potential to minimise risk and maximise returns. Finally, there is the aspect of liquidity in Gold funds as they are extremely liquid. You can redeem them every day during market hours. Moreover, you can redeem as little as Rs 1,000.

Apart from all the above merits, gold mutual funds are closely regulated by SEBI and the redemption process is also quite smooth. Mutual funds are highly regulated by SEBI. This ensures your investments are in safe hands. How to redeem gold funds? You can sell your Gold Fund units whenever you wish. However, the Net Asset Value (NAV) of the previous day is taken as the basis when you decide to sell your gold fund units. Once you start the redemption process, the Fund takes about 2-3 working days to credit the money in your account. The bottom line is that the next time you are looking for a profitable yet dependable investment option, consider Gold Funds.