Everything You Need to Know About Gold Funds

Gold as an investment option is valuable, reliable and an important part of an individual’s investment portfolio. There are many ways in which you can invest in the precious metal. You can either invest in gold through Systematic Investment Planning (SIP) or buy it in lump sum. Some of the popular gold investment options include Physical Gold (gold jewellery, gold coins and gold bars), Gold ETF, Digital Gold, Gold Funds, Sovereign Gold Bond. While all these gold investment options are beneficial, they have their own features and benefits. To know which one of the gold investment options will align best with your financial goals; you need to know have a good knowledge about them. To help you with the same, in this post we are going to look at one such gold investment option – Gold Funds.

What are Gold Funds?        

Gold Funds refer to mutual funds that invest in gold directly or indirectly in various forms such as physical gold or stocks of gold mining or any other gold mining, gold producing or gold distributing companies. Some of the gold funds also invest in Gold ETFs. Such funds are usually known as ‘Gold Funds of Funds’ or ‘Gold FoFs’.

Since, Gold Funds hold most of its assets in bullion or in stocks and bonds of gold mining, manufacturing or distribution companies; the rate of shares within a Gold Fund is quite close to the spot price of gold.

What are the benefits of investing in Gold Funds?

The benefits of Gold Fund as an investment option are listed as follows:

• Includes no storage-related issues: The most common issue with investing in physical gold is its safety for which it needs to be stored in a safe place such as a bank’s locker. Storing in a bank’s locker or anywhere else will also require you pay related charges. But this is not the case with Gold Funds. Gold Fund is an electronic investment. Therefore, unlike physical gold, it includes no storage charges or other storage-related issues. Since it is in a demat form, therefore, no one can steal it.
• Inculcates financial discipline among new investors: To get the best investment returns, discipline is imperative. Many new investors lack discipline. If you are one of them, then investing in Gold Funds through SIP is highly recommended. Investing in gold through SIP makes you set aside a fixed investment amount every month, which gradually turns you into a disciplined investor.
• Allow investors to invest in small amount: Buying physical gold less than a gram is not possible. But buying Gold Funds in small amounts, let’s say ₹500 or ₹1,000 is possible. This feature of Gold Funds not only offers convenience to investors but also encourages more people with low-income to invest in gold.
• Helps in diversifying an investment portfolio: To reduce market risks, investors must always avoid putting all their eggs in one basket. And there is no other asset better for diversifying the overall market risk than gold. Many times in the past, it has been observed that when stocks go down, gold rises up. Investing in gold funds can help investors minimise market risks and maximise returns when other asset classes are not in favour.
• Allows investors to convert ‘units’ into ‘cash’: Another reason why people prefer investing in gold is that it is highly liquid. If there is an urgent cash requirement, liquidating gold is easier and quicker than liquidating any other asset such as property. Gold Funds are also quite liquid. You can encash them every day during market hours. Moreover, you can redeem an amount as small as ₹1,000.
• Offers safe investment experience to individuals: Safety is a common concern among gold buyers. Whether you buy gold online or from stores, you would want to buy it from a reliable source. Mutual funds and that includes Gold Funds are regulated by SEBI (Securities and Exchange Board of India), which is an important regulatory body of securities market in India. SEBI’s one of the main objectives is to safeguard the interests of investors in securities, thus, it is safe to invest in Gold Funds.

How do Gold Funds work?

Fund house collects money from you and other investors. It uses the collected amount to buy gold or shares of gold mining, manufacturing or distribution companies. The fund house then issues ‘units’ to you and other investors as per the amount each had invested. Also, the Net Asset Value or NAV of each Gold Fund unit will be equal. The NAV of a Gold Fund unit depends on gold’s value or the share price of the companies invested in. If the NAV of your Gold Fund goes up, your investments will also grow in value.

How to invest in Gold Funds?

Investing in Gold Funds is easy. One of the reasons for this is that unlike Gold ETF, you do not need to have a demat account to invest in Gold Funds. In addition to this, you can invest in the funds not only through lump sum method of investment but also through SIP. There are various benefits of making gold investment through SIP. Some of them are:

• Signing up for SIP is simple, easy and can be done online in a few minutes.
• It is the best alternative for all those who are not ready for lump sum investment.
• It encourages investors to invest money regularly.
• Due to rupee-cost averaging, investors need not worry about timing the market.
• Investing a specific amount regularly minimises the effects of investing in volatile market.
• Regular investments also make investors more disciplined in saving money, which leads to wealth accumulation.

How to redeem Gold Funds?

You can sell Gold Fund units any day during the market hours. But at the time of selling your Gold Fund units, the NAV of the previous day will be taken into account. Once the redemption process begins, it usually takes around 2 to 3 working days for the money to get disbursed in your account.

Bottom Line

Gold Fund is a profitable and dependable investment option. However, if you are still looking for an alternative, then Digital Gold is another great investment option for you. It is relatively new as compared to other gold investment options but is fast gaining popularity. In this investment option, you can sell and buy gold online at live gold rates anytime and anywhere. People with low-income can also invest in it as Digital Gold allows people to buy gold in fractions. Each fraction of gold purchased is backed by an actual physical gold for which investors need not worry as it includes no storage hassles and costs. Redeeming it is also simple and quick. If you wish to learn more about Digital Gold, click here.