Article

Gold Mutual Fund
September 28 , 2012

 What is a gold mutual fund?

A gold mutual fund invests in units of a gold ETF. Gold ETFs in turn invest in physical gold. Each unit of a GETF usually corresponds to a gram of gold held in the vaults by the fund's custodian. So a gold mutual fund indirectly invests in gold.

Advantages of a gold mutual fund

Gold has long been an investment-cum-consumption item in India. Indian weddings are usually occasions to buy a large amount of gold as jewellery. From a finance perspective too, some gold in your portfolio has the benefit of diversification from equities, debt and real estate.

A gold mutual fund is much more safe, convenient and low-cost than gold jewellery, biscuits or coins. Physical gold purchase from jewellers or banks involves huge transaction costs (often 10% or so, plus making charges in case of jewellery). Similarly, if and when you try and sell these, you incur another 10% or so in transaction costs. Further, you need to invest in a locker to store these safely. In gold mutual funds, annual holding costs are less than 2%, and there are no entry or exit loads. You can sell them at a day's notice.

A gold mutual fund also gives the advantage of systematic purchase. For instance, for your daughter's wedding 10 years later, you can start a monthly investment in a gold fund today. Closer to the wedding, you can sell the funds and buy jewellery. This way, you have not only made the purchase easier on your cash flows; you have also smoothened out fluctuations in gold prices that may occur in the interim.

Limitations of a gold mutual fund

A gold mutual fund doesn't invest directly in gold - it invests in shares of gold mining companies. Sometimes, the two can diverge in their performance.

If you have a demat and trading account, you can invest in what are called gold exchange traded funds (ETFs). These can be bought just like shares, and invest directly in the yellow metal.

Is a gold mutual fund for me?

Gold is a useful addition in your portfolio, upto 10% or so of value. Given the superiority of gold funds and gold exchange traded funds (ETFs) over physical gold, we advise you to hold all your gold in this form.

If you are salaried and wish to invest systematically, an SIP in a gold fund is a great option - within the 10% range mentioned above.

How do I choose my gold mutual fund?

You don't need to do too much research to choose a gold mutual fund. You can go with any of them, since their performance has been similar.

In case of gold exchange traded funds, your life is even easier since they are all identical. You can go for any one of them.

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