What are Gold Mutual Funds?

Posted On Thursday, Jan 23, 2020


There are many ways you can invest in gold —coins, bars, jewellery, etc. These are the conventional avenues to invest in gold. But buying gold via mutual funds is a smart, unconventional, and an easy way to invest in gold.

You have mainly 2 options:

1) Gold Exchange Traded Fund (ETF) – Before understanding Gold ETFs, let’s first understand what is meant by Exchange Traded Funds (ETFs). ETFs are schemes offered by mutual fund houses that are listed and traded on a stock exchange. They represent ownership in an underlying security, commodity, or asset.

Therefore, gold ETF is an instrument that represents ownership of gold assets. This gold is held on your behalf by an appointed custodian for the ETF. Gold ETFs track prices of physical gold. Each unit of gold in the fund you can buy is equal to 1 gram of gold (some fund houses also offer 1 unit at 0.5 gram of old). When you buy a Gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment. A few gold ETFs give the option of taking physical delivery and some don't; and if they do, it’s only after exceeding a certain quantity.

Gold ETFs are listed and traded on a stock exchange. Hence, these can be bought and sold like stocks on a real-time basis. But to own them, you need to open a demat account along with a share trading account with your broker. While transacting in Gold ETFs, you are required to simply call your broker and place your orders (at the prevailing market price), or transact through the online trading application he/she provided (broker).

2) Gold Savings Fund – Also known as a “gold fund”, is another unconventional way to invest in gold. A gold savings fund is a fund of fund scheme that invests its corpus into an underlying Gold

ETF which benchmarks the performance against the physical prices of gold. Hence by doing so, the returns closely correspond to the one clocked by the underlying gold ETF. However, unlike a Gold ETF (where you hold units in your demat account); in a gold fund, you are allotted units of the fund in a paper form, which would reflect in your mutual fund account statement.

Suitability: Both, gold ETF and a gold savings fund are smart ways to invest in gold without actually tangible hold. If you do not possess a demat account, gold fund is an option for you. Note, the precious yellow metal as an asset class is an effective portfolio diversifier and shows its trait of being a safe haven during economic uncertainties. From an asset allocation standpoint, you consider apportioning some portion (say, for example, 10%-15% of your total investment portfolio to gold) and hold it for the long-term.

In addition to the above, there are solution oriented funds and other funds. Solution oriented funds help you, the investor, plan for your life goals such as your children’s future needs (education and wedding expenses) and your retirement. As per the regulator’s categorisation, they are required to carry ‘Retirement Fund’ or ‘Children’s Fund’ in their complete scheme name.

Retirement Funds have a lock-in of 5 years or your retirement age, whichever is earlier. Similarly, Children’s Funds have a lock-in of 5 years or until the child attains the age of majority, whichever is earlier.

Other mutual funds, as the regulator’s categorisation, include Index funds, Exchange Traded Funds (ETFs), Fund of Funds (FOFs).

Index Funds are passively managed as they seek to replicate a particular index, say S&P BSE Sensex or NSE Nifty 50. They maintain an investment portfolio that replicates the composition of the chosen index. As per the regulatory guidelines, index funds and ETFs are expected to invest a minimum 95% of the assets of the scheme in securities of a particular index (which is being replicated/ tracked by the scheme).

Fund of Funds invests money in other schemes of the same mutual fund house or other mutual fund houses. A minimum of 95% of the scheme’s total assets is invested in the underlying fund/s. So, FOFs facilitate holding a single portfolio of funds rather than overcrowding your portfolio. These schemes provide the opportunity to build a portfolio of well-researched fund portfolio across mutual funds.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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