Gold funds are a kind of mutual fund investment that indirectly or directly invest in gold reserves. Such investments are generally made in gold stocks of distributing and producing syndicates, mining companies, gold Exchange-Traded Funds (ETFs), and physical gold. This is one of the convenient ways of investing in gold assets without the requirement to purchase and store the commodity in physical form.
A gold mutual fund is an open-ended market investment dependent on its underlying assets, such as gold ETFs, whose value is based on the price of the precious metal. One of the biggest advantages of investing in a gold fund is that it acts as a hedge against economic shocks. Thus, diversifying your investment portfolio with 10%-20% investment in gold mutual funds may help secure your overall investments from fluctuating markets. However, before you do so, you must understand how gold funds work and what important factors you must incorporate to choose the correct gold mutual fund.
How does a gold mutual fund work?
The basic aim of gold mutual funds is to form wealth through the potential of the precious commodity. It is very easy to invest in gold through a gold mutual fund instead of buying and holding this commodity physically. Note that investing in a gold fund endows you with almost similar benefits as holding the commodity physically along with an assurance of professional fund management.
Each gold mutual fund has a professional fund manager who takes investment bets according to the fund’s objective. The returns earned on gold mutual fund closely corresponds with gold ETFs. Moreover, the Net Asset Value (NAV) of the gold fund is highly influenced by the gold’s price movement in the market.
What are the things you should know when choosing a gold fund?
- Seasonal behaviour
The performance of gold indicates seasonal patterns. During market downturns, gold earns good returns, otherwise, in rising market conditions, it may underperform other asset investments. You can always understand gold’s seasonal patterns by tracking its historical performance.
If you have a small to mid-sized investment portfolio, then gold is not the ideal asset option for diversification as it earns low returns than other asset classes. But if you have a large investment portfolio, you may consider allocating some amount to gold mutual funds to hedge the risk and balance out your portfolio in times of market crisis. However, ensure to do so without compromising your financial goals.
- Dynamic portfolio allocation
Tactful gold allocation to your portfolio is important. In simpler terms, increasing investment in gold mutual funds during market depression is necessary to generate high returns. Likewise, as the market recoups, shifting such investments to other asset investments that have a higher potential to earn more returns is a wise move. Thus, with a dynamic allocation approach, you can reap maximum benefits from your gold fund investment.
When choosing a gold fund, you must review the fund from various angles. There are different qualitative and quantitative factors, which can be undertaken to decide the suitable gold mutual fund according to your requirements. Additionally, it is recommended to keep your risk appetite, financial goals, and investment horizon in mind before you choose and invest in a gold fund.