Gold Funds

This is increasingly becoming the mode of holding Gold from an investment perspective. They allow investors by units of a gold fund on the stock exchange. The gold fund is a passive in gold investment.


Benefits Of Gold Mutual Funds

The benefits of gold mutual funds are many:

1. Hedge against inflation: Gold is mainly seen as a “store of value”. It should be looked at as an alternative to currency. While currency can be printed (and demonetized) at will, Gold is the warehouse where you stock the value of your money. Gold provides the hedge against inflation.

2. Liquidity: Gold is arguably the most liquid of all non-cash instruments. Irrespective of where you are in the world, locating someone who will readily offer cash in exchange for gold is not difficult.

3. Source of Diversification: Diversification essentially means spreading out the investments across different asset categories such that the loss is one asset category is offset by a gain in another. However, if we spread across different asset categories which behave in a similar fashion, (i.e. gain in one is accompanied by a gain in another and loss in one is accompanied by a loss in another), then there is no benefit of diversification. In order to achieve the goal of spreading risk, one needs to diversify across asset categories that are “negatively correlated” or has “low correlation”. A negative correlation means that the rise or gain in one asset category is usually accompanied by a fall or loss in another asset category. Gold tends to have negative or low correlations to most assets usually held by institutional and individual investors whether it is in good times or bad. Gold in a portfolio can reduce the volatility of the portfolio without necessarily sacrificing expected returns.

4. Protection in Financial Distress: Gold is the last bastion of value. Investors hold on to Gold knowing that, when everything else fails to work, gold can get them out of trouble. As uncertainty increases, investors prefer to “stre” value until relative clarity emerges. Thus, when every other asset class is losing value, the price of Gold increases. Thus, Gold helps in protecting the value of the portfolio.

How is it different from buying gold coins or bars?

Gold coins or bars require effort and expense to keep them safe. They may also incur transaction costs. Gold funds on the other hand are electronic and offer easy liquidity.


Who should invest in Gold Mutual Funds?

Almost everybody can invest in gold funds. If you are looking for a hedge against inflation, gold is a good option.


How long should I stay invested for in gold funds?

Gold mutual funds are a good asset category for cushioning your portfolio against inflation shocks. You can consider a time horizon of 7 years or longer on these investments.


How much should I invest in Gold Funds?

There cannot be a generalized asset allocation for one and all. A professional investment advisor such as a Registered Investment Advisor (RIA) will help you arrive at the right allocation. RIAs are registered with the Securities & Exchange Board of India (SEBI) and play a fiduciary role. This means that they are focused on giving you right interest for a fee. It is illegal for them to make any commission income on your hybrid fund investments.


How should one invest in Gold Funds?

You can invest in hybrid mutual funds by choosing any of the fund categories listed below. Then entire process is seamless and can be done in minutes.
You can take the advice of a SEBI Registered Investment Advisor to help you select the right gold fund. Out here at Jamā we have a list of gold funds carefully selected by SEBI RIAs that does this work for you. They also track the performance of the funds and ensure that these investments are 100% aligned to your life goals.


How does a Gold Fund Work?

Let us understand this with the help of an example.

M/s Glitter Asset Management company comes up with a Gold Fund, wherein it offers units to investors at an initial price of Rs.10 per unit. A person willing to invest Rs.1000 in gold can buy 100 units of this fund while a person willing to invest say Rs.50,000 can buy 5000 units.

In total, the fund collects Rs.100 crores from all investors, issuing 10 crore units. Let us say, the price of gold on that particular day is Rs.2,50,000 per kilogram. The Gold fund buys 4,000 kgs of gold. In the next one month, gold prices shoot up to say, Rs.275,000 per kilogram. This means the value of gold held by our fund goes up to Rs.110 crores (4000 kg *Rs.275000 per kg)

This translates into the value of 1 unit of the gold fund increasing to Rs.11 (Rs.110 crores of fund value / 10 crore units). Thus, a person who bought only 100 units of this fund sees an appreciation of 10% in his portfolio. If he wishes to sell his investment, he can redeem the units of this gold fund with the Asset Management Company at the prevailing NAV of Rs.11 per unit.


Thus, a gold fund facilitates small investors also to do gold investments. Since the fund is actually buying and selling the gold as well as holding the gold, there are no worries pertaining to quality of gold, storage and the risk of paying higher (making/ wastage, etc) or selling lower ( deductions). However, a small asset management fee has to be paid to the fund.



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Benefits Of Gold Mutual Funds

The benefits of gold mutual funds are many:

1. Hedge against inflation: Gold is mainly seen as a “store of value”. It should be looked at as an alternative to currency. While currency can be printed (and demonetized) at will, Gold is the warehouse where you stock the value of your money. Gold provides the hedge against inflation.

2. Liquidity: Gold is arguably the most liquid of all non-cash instruments. Irrespective of where you are in the world, locating someone who will readily offer cash in exchange for gold is not difficult.

3. Source of Diversification: Diversification essentially means spreading out the investments across different asset categories such that the loss is one asset category is offset by a gain in another. However, if we spread across different asset categories which behave in a similar fashion, (i.e. gain in one is accompanied by a gain in another and loss in one is accompanied by a loss in another), then there is no benefit of diversification. In order to achieve the goal of spreading risk, one needs to diversify across asset categories that are “negatively correlated” or has “low correlation”. A negative correlation means that the rise or gain in one asset category is usually accompanied by a fall or loss in another asset category. Gold tends to have negative or low correlations to most assets usually held by institutional and individual investors whether it is in good times or bad. Gold in a portfolio can reduce the volatility of the portfolio without necessarily sacrificing expected returns.

4. Protection in Financial Distress: Gold is the last bastion of value. Investors hold on to Gold knowing that, when everything else fails to work, gold can get them out of trouble. As uncertainty increases, investors prefer to “stre” value until relative clarity emerges. Thus, when every other asset class is losing value, the price of Gold increases. Thus, Gold helps in protecting the value of the portfolio.

How is it different from buying gold coins or bars?

Gold coins or bars require effort and expense to keep them safe. They may also incur transaction costs. Gold funds on the other hand are electronic and offer easy liquidity.


Who should invest in Gold Mutual Funds?

Almost everybody can invest in gold funds. If you are looking for a hedge against inflation, gold is a good option.


How long should I stay invested for in gold funds?

Gold mutual funds are a good asset category for cushioning your portfolio against inflation shocks. You can consider a time horizon of 7 years or longer on these investments.


How much should I invest in Gold Funds?

There cannot be a generalized asset allocation for one and all. A professional investment advisor such as a Registered Investment Advisor (RIA) will help you arrive at the right allocation. RIAs are registered with the Securities & Exchange Board of India (SEBI) and play a fiduciary role. This means that they are focused on giving you right interest for a fee. It is illegal for them to make any commission income on your hybrid fund investments.


How should one invest in Gold Funds?

You can invest in hybrid mutual funds by choosing any of the fund categories listed below. Then entire process is seamless and can be done in minutes.
You can take the advice of a SEBI Registered Investment Advisor to help you select the right gold fund. Out here at Jamā we have a list of gold funds carefully selected by SEBI RIAs that does this work for you. They also track the performance of the funds and ensure that these investments are 100% aligned to your life goals.


How does a Gold Fund Work?

Let us understand this with the help of an example.

M/s Glitter Asset Management company comes up with a Gold Fund, wherein it offers units to investors at an initial price of Rs.10 per unit. A person willing to invest Rs.1000 in gold can buy 100 units of this fund while a person willing to invest say Rs.50,000 can buy 5000 units.

In total, the fund collects Rs.100 crores from all investors, issuing 10 crore units. Let us say, the price of gold on that particular day is Rs.2,50,000 per kilogram. The Gold fund buys 4,000 kgs of gold. In the next one month, gold prices shoot up to say, Rs.275,000 per kilogram. This means the value of gold held by our fund goes up to Rs.110 crores (4000 kg *Rs.275000 per kg)

This translates into the value of 1 unit of the gold fund increasing to Rs.11 (Rs.110 crores of fund value / 10 crore units). Thus, a person who bought only 100 units of this fund sees an appreciation of 10% in his portfolio. If he wishes to sell his investment, he can redeem the units of this gold fund with the Asset Management Company at the prevailing NAV of Rs.11 per unit.


Thus, a gold fund facilitates small investors also to do gold investments. Since the fund is actually buying and selling the gold as well as holding the gold, there are no worries pertaining to quality of gold, storage and the risk of paying higher (making/ wastage, etc) or selling lower ( deductions). However, a small asset management fee has to be paid to the fund.


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Mutual Funds are subject to market risk. Please read the scheme documents carefully before investing