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Who Should Invest In Gold Mutual Funds?

By Author: Bhagath Varma
Total Articles: 12

Human civilization has had a special penchant for the yellow metal since time immemorial and this is evident from the fact that it has always been considered the safe-haven during times of uncertainty. It is not only considered auspicious in many cultures but is also supposed to be a great investment option. Now if you are here to figure out whether you should consider adding some sheen to your portfolio, you must first understand what’s your motive behind this. Are you looking to hold this precious metal for a long-term goal like your child’s wedding or you simply want an exposure in this asset class for its unique attractiveness?

If you are looking to accumulate gold for the long-term, investing in Gold ETFs is a wiser option than holding it in physical form. Physical gold investment comes with many demerits like additional cost of making charges, security concern and you must bear the cost of its safe upkeep over the years. While holding the precious metal in physical form may seem very liquid, it is not so since you may loose some of its value while trying to exchange a piece of jewellery due to the inherent making charges. There are chances of being cheated unless you sell it to a trusted party. Hence ETF investments are a more convenient option as compared to holding the yellow metal in physical form.

Gold ETFs invest in the bullion of 99.5% purity and thus track the price movement of the physical metal. Since they are listed on an exchange, they offer liquidity of the highest order. You can buy or sell your holdings at any time during the day. But investing in ETFs is not the same as owning physical units of the yellow metal. Don’t expect to receive physical gold when you invest in such ETFs. But investing in such ETFs help you participate in the price appreciation of the metal and you can sell your holdings at any time to buy golden items of the same value if the need arises.

Another kind of investment could be in Gold-related ETFs that invest in stocks of companies involved in the mining, fabrication, manufacture and distribution of this metal. In such ETFs you don’t buy units equivalent to physical gold but invest in stocks of these companies involved in gold-related activities. The stocks of such companies do move in tandem with physical gold prices but being stocks they carry the volatility inherent to any company stock. Thus Gold-related ETFs tend to be more volatile than the ETFs we discussed in the previous paragraph.

The other option is to invest through gold mutual funds that invest in stocks of companies involved in mining, processing, fabrication and distribution of this metal. The performance of these mutual funds is dependent on the movement of stock prices of these companies. These Mutual Funds too are more volatile than Gold ETFs for the same reason Gold-related ETFs are. But gold mutual funds are actively managed unlike Gold-related ETFs that are passively managed. These such mutual funds are more likely to earn a better return over the long-term than Gold-related ETFs since the fund manager uses his expertise and takes active calls to buy better performing stocks and sell underperforming stocks. But in case of a Gold-related ETF that mimics an index, all kinds of stocks are held including the underperformers. However, ETFs have a lower expense ratio compared to the actively managed mutual funds. Hence ETFs are more cost efficient.

ETFs are also more tax efficient as compared to mutual funds since they are passively managed and thus have a lower portfolio turnover. In case of actively managed mutual funds, the fund manager must constantly buy and sell stocks to achieve some alpha (or extra return over its benchmark). This churn in the portfolio attracts more tax in the form of capital gains tax which affects the fund’s return. If you are comfortable taking some extra risk, mutual funds are a good option to get exposure in this asset class. If you have low to moderate risk appetite, Gold-related ETFs are better suited for you as they simply mimic a market index and provide great diversification. But if you are looking to accumulate gold over the long-term for a reason, invest in pure Gold ETFs that give you exposure to the bullion and are a good substitute for physical gold since you can convert your holding to physical form at any time.

You can learn more about mutual funds, their types and how to choose a mutual fund for your life goals on a site that’s meant to answer all queries on mutual fund. Try this site next time you’ve a question on mutual funds, Mutual Funds Sahi Hai .

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