What are gold funds?
These 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’.
How does it work?
The fund house collects money from thousands of investors like you. 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.
Net Asset Value
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 .
How to invest?
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?
Changes in the value of gold
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.
Asset class risk
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.
Currency exchange risk
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.
Individual stock risk
On the other hand, individual company risk 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.
Why invest in gold funds?
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.
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.
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.
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.
Gold funds are quite liquid. You can redeem them every day during market hours. Moreover, you can redeem as little as Rs 1,000.
Mutual funds are highly regulated by SEBI. This ensures your investments are in safe hands.
How to redeem it?
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 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:
The next time you are looking for a profitable yet dependable investment option, consider Gold Funds.
It is a market where investors trade in primary products rather than manufactured products. Agricultural products such as wheat, coffee, cocoa, and sugar are called soft commodities whereas mined commodities such as gold and oil are called hard commodities. MCX in India, COMEX in London, and NYMEX in the US are popular commodity exchanges.
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