Gold funds are a type of investment fund that allows investors to pool their money together to purchase gold-related assets, such as gold stocks, stocks of mining companies, and gold Exchange-Traded Funds (ETFs).
However, gold funds provide more than just exposure to the yellow metal—they also offer the liquidity, flexibility, and tax efficiency that come with stock investments. Today, one can invest in gold in various ways, including investing in gold mutual funds, Sovereign Gold Bonds (SGBs), and gold ETFs. Here is a detailed overview of gold funds and reasons why one should invest in these funds.
What are gold funds?
A gold fund is an open-ended mutual fund that invests in various forms of gold in the form of physical gold or stocks of gold mining companies. You can purchase and sell gold at its market price and get exposure to the precious metal without having to directly purchase and store physical gold. And over the long term, the price of gold has tended to rise, making gold mutual funds a good choice for investors who can handle short-term fluctuations.
Why to invest in gold funds?
- Flexibility of investments
Gold funds offer investors more flexibility than physical gold. It allows investors to invest regularly through affordable Systematic Investment Plans (SIPs), which makes it easier for those with less income to invest in this fund. The fixed SIP amount does not need to be very high, and you can choose the frequency as weekly, monthly, annually, etc., as per your convenience.
Gold is often seen as a safe investment during unstable times. Gold prices and the stock market have an inverse relationship. Historically it has been seen that whenever the stock market crashes, the value of gold tends to go up. This makes gold a good option for those who want to protect their investments from inflation or economic downturns.
- Lower risk
Gold funds are regulated by the market regulator Securities and Exchange Board of India (SEBI), ensuring they are safe and reliable investment products. So, these funds are ideal for investors who want to diversify portfolios and lower the risk of investment.
- Dynamic diversification
Because gold funds invest in stocks of different companies involved in the gold industry, they offer investors the opportunity to diversify their portfolios. By adding some balance to your portfolio, gold can protect you from market events.
Over the long term, investing in gold funds has been shown to be a profitable endeavour. For example, between 2000 to 2010, gold prices rose from ₹4,400 per 10 gm to ₹18,500 — giving around 320 percent return to gold investors. And between 2010 and 2020, gold prices rose from ₹18,500 per 10 gm to ₹52,000.
If liquidity is an important factor for you, then gold funds are worth considering. Gold can be bought or sold anytime during trading hours at the prevailing price and tend to have a high trading volume. So, you can get access to your money whenever it is that you require.
Gold funds are a good investment for individuals who want to invest in this precious metal but don’t want to worry about safety, liquidity problems, storage, and maintenance costs concerned with physical gold. However, it is equally important to research the fund carefully, understand how it works, analyse your risk tolerance, and figure out your financial goals before investing.