India is the second-largest consumer of gold following China and Indians buy gold in various forms like coins, bars, jewellery, etc. Gold mutual funds can be used as a hedge to protect an investor against economic shock. Many investors diversify their investment portfolio with 10 to 20% investment into gold funds as a means to secure themselves from the fluctuating market. This article will throw some light on important things to consider before investing in these mutual funds.
How do Gold Funds work?
Gold funds are types of open-ended mutual funds that directly or indirectly invest in gold reserves. The principal aim of gold mutual funds is to generate wealth by making use of gold as a commodity. Gold funds are ideal for those investors who have a desire to be exposed to gold. Experts believe that it is opportune to invest in gold via gold mutual funds rather than holding the commodity sensibly.
An investor might enjoy the benefit of holding gold physically, along with professional fund management. Each gold mutual fund has a fund manager who would take investment bets according to the objective of the fund. The returns on gold mutual funds might closely correspond to that of the gold ETF. Additionally, the NAV (net asset value) of the fund could be influenced by the total price movement of gold in the market.
Things to consider as an investor
Following are some of the things to consider before you consider to invest in gold mutual funds:
- Lower Returns: Unlike equities, gold funds may not fetch you exceptionally high returns. Basically, during a market crisis, investments in the gold market are driven by the need for a safer haven investment option. As soon as the investor regains their confidence, they could switch over to riskier options such as mutual fund investments and stocks. Thus, gold funds may not be considered as a long-term option for wealth creation.
- Seasonal Behaviour: Gold is likely to having seasonal response as far as performance is concerned. It gives comparatively higher returns only during periods of insecurity in the market. However, at other times, an investor might find it lagging behind other asset classes. In such a state, gold can be perceived more like an insurance coverage than an investment opportunity.
- Diversification Issues: Often, experts advise investors to diversify their investments into gold to spread the overall risk of their investment portfolio. However, gold may not be considered as an ideal asset class for portfolio diversification in all cases. This is particularly true for investors holding small to medium-sized investment portfolios. It is because of the low return generating capability of gold as compared to other asset class. However, for large-sized portfolios, a small amount could be allocated towards gold as a risk cover without damaging the overall goal accomplishment.
- Dynamic Portfolio Allocation: You might consider allocating a part of your portfolio towards it. However, the only thing to consider it is to be tactical. During the market depression, you may consider allotting a more significant portfolio allocation towards gold and vice versa. A dynamic approach could help you in reaping the benefits of investing in gold.
Now that you have understood the basics of gold mutual funds evaluate carefully before deciding to invest in them. It is always advised to ensure that your portfolio aligns with your investments goals and risk appetite before you choose to invest in mutual funds. Happy investing!