What is Gold Fund?
The term “gold fund” refers to the investment fund that purely invest in gold and other related assets. Some of the most common types of gold fund invest directly into physical gold bullion or purchase gold futures contracts or stocks in gold mining companies. These type of funds are available in the form of either exchange-traded funds (ETFs)or open ended mutual funds that imitate the performance of real gold.
Explanation of Gold Fund
The gold fund is nothing but an indirect purchase of gold asset instead of a direct purchase of the real gold. Basically,the value of these funds are directly linked to the movement in the gold price in the global market. These type of funds are more popular among investors who use it to hedge against inflation risks are particularly bullish about the future of gold.
Purpose of Gold Fund
The two major reasons of investing in gold funds instead of real gold are as follows:
- Some investors find investment in real gold to be risky as physical storage exposes them to the risk of theft. So, with the gold fund one can invest in gold but without the issue of physical storage.
- The gold fund aids the planning of a systematic investment strategy, unlike the 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 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 involved in the process of gold fund investment.
- Step 1: The Asset Management Company (AMC) has to select a suitable fund manager who will be responsible for managing the gold fund.
- Step 2: The AMC has to complete the registration and get the license.
- Step 3: The AMC has to hire a transfer agent and custodians for maintaining the fund transactions.
- Step 4: Now, starts marketing and advertising to let the prospective investors and the market know about the new fund.
- Step 5: As these are open-ended funds, both purchase and redemption of the fund is fairly easy and can be done anytime.
- Step 6: After raising money from interested investors, the fund manager not only invests in gold processing companies but also purchases real gold from the market.
- Step 7: Finally, the price of a gold fund, like any other mutual fund, is determined from its net asset value (NAV) per unit. The NAV is the net value left after deducting the liabilities from the invested fund and hence the name.
Examples of Gold Fund
The following are examples of some of the best global gold funds available in the worlds:
- Invesco DB Precious Metals (DBP): The fund was started in January 2007 and as of September 09, 2020, it’s 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 it’s 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, it’s total asset stands at $3.5 billion. During2019, which was its first year of operation, the fund has 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 and as of September 09, 2020, it’s total asset stands at $2.8 billion. During the last 3 years/ 5 years/ 10 years, the fund has generated 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 are best suited for the following:
- Investors who seek to diversify their investment portfolio to reduce investment risk at the portfolio level. These funds are closely monitored by the regulatory authorities.
- Conservative investors who want to invest in an asset that is indifferent to market fluctuations. Indirect investment in gold bullions through gold funds is the perfect hedge against a volatile market.
Some of the major advantages of gold fund are as follows:
- Investments in gold fund don’t require any physical storage which makes it far less risky than holding real gold. As a commodity, gold is one of the very precious metals and hence it is always exposed to the risk of 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 diversification of investment portfolio 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.
- Gold fund is more liquid than real gold as its purchase and redemption is much easier than that of real gold.
Some of the major disadvantages of the gold fund are as follows:
- 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. These all charges result in a lower return on investment.
- As an investment, a gold fund doesn’t generate any regular income.
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 a gold fund before putting their money in it.
This is a guide to Gold Fund. Here we also discuss the introduction and how does gold fund work? along with advantages and disadvantages. You may also have a look at the following articles to learn more –