What are gold mutual funds?
Introduction
The sudden outbreak of COVID-19 has led to a surge in the prices of gold by over 25% both in India as well as in foreign markets. Gold has always been considered as a safe haven for investment in times of global crisis. People bought a lot of gold in this year which caused the prices to hit a new high of ₹ 53,920 per 10 grams. One must be curious to know the reason behind this scenario but in order to understand it you must know what affects gold prices. Whenever economic conditions are in downward trend, then all the asset classes like real estate, stock markets etc., perform very badly because people are very skeptical to invest in these assets. Frequent rate cuts by RBI make investors to pull their money out of portfolios as they will not earn expected returns due to rate cuts. Therefore, investors choose to invest in gold as we know the prices of gold never falls by a large margin. Given the limited supply, when large number of investors choose to invest in gold means demand for gold goes up thereby causing a spike in the prices of gold.
With the advent of technology and innovations in mutual fund markets, investors prefer to invest in gold mutual funds and gold ETFs which reduce the hassle for investors in buying and searching for gold lockers. The demand for gold jewellery fell 48% year-on-year basis between July and September in 2020 but demand for gold as an investment went up to 52% on a year-on-year basis which indicates that Indians are now choosing gold ETFs over physical gold. Western investors and central banks piling into gold during the pandemic was more than making up for a collapse in demand for physical gold pushing the gold prices to an all-time high. Returns as high as 30% were reaped by gold mutual fund investors in 2020. Having said that let us understand about gold mutual funds in detail:
Gold mutual funds:
Gold mutual funds are a type of mutual funds that are investing in gold reserves. It has become convenient to invest in gold as an asset instead of hoarding it in physical state. In gold funds, fund managers invest on the stocks of gold producing and distributing syndicates and on stocks of mining companies. Gold mutual funds are open-ended schemes in nature. The primary purpose of the gold funds is to create wealth for the investors and create a cushion against market collapse.
There are three ways of investing in digital gold via mutual funds:
Investors often get confused between gold mutual funds and gold ETFs. The below table of comparison provides the differences between the two:
Difference between gold mutual funds and gold ETFs
| Basis | Gold mutual funds | Gold ETFs |
|---|---|---|
| Mode of Investment | Units can be purchased from the fund house without using demat account | Units can be bought from stock exchanges with a Demat account |
| SIPs | SIPs can be used to invest in gold mutual funds | Gold ETFs do not allow SIPs for investments |
| Prices | Prices of gold fund units can be determined by looking at NAV at the end of the trading hours. | Their prices can be ascertained by the stock exchanges as Gold ETFs are listed on stock exchanges |
| Costs of transactions | Transaction costs are there if redeeming the funds early | No transaction costs are incurred |
| liquidity | Less liquid than gold ETFs | High Liquidity |
Let us now look at the characteristics of a gold mutual fund:
Returns: Gold gives exceptionally high returns when the economy is facing crisis as more investors rush to gold to secure their investments. When economy starts recovering then investors reshuffle their portfolios as their confidence is boosted by positive growth. Gold’s returns are not always high as investors move to other assets once economy recovers and that is why its lags other assets like equity in normal economic conditions.
Dynamic portfolio Allocation: You must have often heard your fund manager asking you to allocate some amount to gold in order to diversify your portfolio. If you are holding smaller to medium size portfolio then gold is not the good option to diversify. It is because gold has less returns generating capacity as compared to other classes of assets. On the contrary, when you are holding larger portfolio then you can think of investing a small portion of your wealth into gold. However, investors with larger portfolios should be tactical and must move to other asset classes once markets are out of depression.
Advantages of Gold mutual funds
SIPs are allowed: Gone are the days when investors used to worry about keeping the gold safe in their lockers. Now, Gold funds have made investing a lot easier and without even having to purchase it in physical form. Investors can take systematic investments plans to invest in gold as they can start with as low as ₹ 500. This has worked well for low income earners as they can also invest in gold funds through SIPs.
No Storage issues: In the physical mode, one needs to store the gold bars, coins or jewelry in a safe place like bank locker or safe at home. Storing in a bank result in storage-related costs. In gold mutual funds or FoFs, storage issues do not arise as these are electronic investments. Investors do not have to lose their sleep in protecting their investments.
Demat Account not required: Like other mutual fund schemes, demat account is not necessary for investing in Gold Mutual Funds and Gold Fund of Funds. Only when someone is investing in Gold Exchange Traded Funds, a demat account is compulsory.
Financial discipline: New investors learn about the investing through SIPs. They must do SIPs in gold mutual funds on a monthly basis and hence, gradually, it becomes their habit to save for investment monthly. By investing in gold mutual funds through SIPs, investors learn the art of financial discipline.
Given below is the list of some of the top performing Gold Mutual Funds:
| FUND SCHEMES NAME | 1 Year Return | 3 Year Return | 5 Year Return |
|---|---|---|---|
| Axis Gold Fund | 29.20% | 19.85% | 13.39% |
| HDFC Gold Fund | 29.15% | 18.86% | 13.39% |
| Kotak Gold Fund | 28.95% | 19.70% | 13.56% |
| SBI Gold Fund | 29.15% | 19.02% | 13.29% |
Gold mutual funds have a given a return of close to 30% in the last 1 year in comparison to 13.30% return by Sensex and 12.56% return by Nifty.
Conclusion
Since ages, gold as an investment vehicle has always been the attraction of the Households either for matrimonial or saving purposes and the craze is still same in current times except the investment mode. Gold funds are for those investors who want to reap higher returns in times of political and economic crisis. Investors should keep in mind that the returns on a gold fund may reflect the returns of gold ETFs since gold mutual funds invest in the units of Gold ETFs.