Gold Fund

What is a Gold Fund?

Gold Funds are open ended mutual Funds or exchange traded funds that mimic the performance of real gold by investing in Gold companies that are into gold extraction or jewelry making. So instead of buying real gold, you can invest in such a fund and its prices will change as per the gold price in the market.

Purpose

Investment in real gold is risky as it requires storage, and theft risk is also there. So if someone is planning to invest in gold and still doesn’t want the risk exposure of storageRisk Exposure Of StorageRisk Exposure refers to predicting possible future loss incurred due to a particular business activity or event. You can calculate it by, Risk Exposure = Event Occurrence Probability x Potential Lossread more, they can easily buy Gold Fund. One of the most significant drawbacks of investing in Real Gold is that when you try to sell it, there is always an issue of impurity that the buyer subtracts from the gold price. So to eradicate the problem of storage and impurity, one can easily bank on buying Gold Fund rather than buying real gold.
Small investments are not possible in real gold. Real gold requires a certain amount that needs to be invested, say the smallest quantity that you can buy is 1 gram. So every month, the price of 1 gram gold will change. It will be tough to make a systematic investment if you plan to buy real gold, as 1 gram gold will change every month. It will also be an issue to store such a small quantity of gold. So to avoid all the problems, one can quickly put the Gold fund. It helps to invest equal amounts every month, and also no storage factor is there.

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Source: Gold Fund (wallstreetmojo.com)

How does Gold Funds work?

It operates just like other mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more. The steps are mentioned below:

Step 1: An Asset Management companyAsset Management CompanyAn Asset Management Company (AMC) refers to a fund house, which pools money from various sources and invests the same in purchasing capital on behalf of their investors.read more selects a Fund Manager who will operate the gold Fund.

Step 2: The Asset Management Company performs registration and licensing work with the government.

Step 3: Custodians, Transfer AgentsTransfer AgentsA transfer agent tracks and maintains the records of an organization’s shareholders. Examples of transfer agents are financial companies, trust companies, banks, or individuals. Listed firms often assign the management of their shareholders’ data to a transfer agent. For instance, Amazon’s transfer agent is Computershare. Amazon has provided its shareholders with the agent’s contact details to help them update their names, addresses, or report on lost share certificates.read more, and other parties required in the process are selected.

Step 4: Fund starts to advertise in the market, and investors begin to invest money.

Step 5: These are open-ended funds, so redemption and subscription to the fund directly can be done anytime.

Step 6: When the money is collected, the Fund Manager selects companies whose revenue is related to gold and buys real gold from the market.

Step 7: The price of the Gold Fund is the Net asset value per unit of the fund. The Net Asset ValueNet Asset ValueNet Asset Value is calculated by subtracting the total value of the entity’s liabilities from the total value of its assets and dividing the result by the total number of outstanding shares.read more is the net value left after the deduction of liabilities from the fund. If the Net Asset Value of the fund is $1 m and there are 100,000 units, then the Net asset Value Per share is

= $ 1,000,000/ 100,000
= $10

So each unit can be bought by paying $10.

How to Invest in Gold Funds?

These units can be bought directly from the fund without any Demat Account. The units of the fund can be purchased directly from the fund house. The price depends on the price of gold and also on the cost of the company’s stock that the fund invests. So the Net Asset Value per Unit changes every day. If one has to buy a unit, they will have to buy at the previous day’s NAV/Share once the buying order is placed. The Transfer agent of the fund will complete the legal work of the investor and will pass the buying order to the fund. Once the fund processes the order, they will allot units to the investor.
Systematic investment is also possible where standing instructions are given that each month a certain amount of money will be deducted from the bank and transferred to the Fund House.

Advantages

These investments are safe, as it is hazardous to buy and hold real gold. Storage is an essential issue for Real gold. Gold as a commodity is very precious and has a very high theft risk. Keeping the Gold Fund eliminates that risk
Gold is an essential hedgeHedgeHedge refers to an investment strategy that protects traders against potential losses due to unforeseen price fluctuations in an assetread morehedge against inflation. When prices of commodities start to increase, gold is the best hedger. Gold prices rise along with inflation. So if an investor wants to keep its purchasing power intact, then he should invest in gold.
Gold is a very good diversifying agent. If you keep a portfolio of gold along with other equities, then it will act as a diversifier. It means that when the prices of other equities go down, then the cost of the fund will increase.
This fund is very liquid. So buying and selling is more comfortable than actually buying and selling real gold.
Minimal investments can be made, which is not possible in the case of Real Gold. Real gold will require a minimum investment, which is relatively high as compared to a minimum investment.

Disadvantages

Many times the investment made by the portfolio managerPortfolio ManagerA portfolio manager is a financial market expert who strategically designs investment portfolios.read more is on foreign companies who are into gold extraction. So while converting the return earned from the investment in foreign countries, the currency exchange rate may go unfavorable. This will deplete the actual return made.
If there is any issue in the particular company and the price of the company falls where the portfolio manager has invested, then the return from the fund will decline.

Conclusion

The Gold Fund is critical as it reflects the real picture of commodity gold. If someone wants to gain exposure in gold and still doesn’t want to take the risk of losing the commodity, then he should blindly invest in this. It is a good diversifier and should be taken as an alternative to buying gold.