Gold has been used as a currency from time immemorial, but investing it as an instrument to accumulate more wealth is a whole new concept. Gold funds act as an excellent diversified portfolio for creating a hedging strategy to protect against inflation, falling currency prices ,or stock market declines.
There are various lucrative options available nowadays for investing gold and it is not seen as just a precious metal; there can be gold hedge funds, gold-backed securities, exchange-traded gold funds, gold funds, gold mining stocks, and gold futures amongst many other options. Among all these gold investment options available, gold ETFs (Exchange Traded Funds) and the gold mutual funds (paper gold) are the best gold investments that gain the maximum attention of the investors. This is because both these gold investments simplify the gold buying process, provide a safer accumulation of gold, provide better liquidity as compared to other gold investment processes, and are available throughout the year.
Investing in gold funds is one of the newest ways to invest in gold without having to hold the asset class in physical form. Gold funds are open-ended mutual funds that allow the citizens to invest without a share trading account. Gold Mutual Funds do not directly invest in physical gold but invests indirectly through ETFs. In gold Mutual funds, an asset management company is entrusted with the responsibility to buy gold on behalf of the investors, just like any other mutual fund investment scheme. The pooled investment is then invested in a gold ETF. Therefore, as ETFs’ investment is done via gold mutual funds, investment through a gold mutual fund is more expensive than investing in a gold ETF directly.
Top Gold Mutual Funds to Invest in
Some of the top gold mutual funds that are performing quite well are listed below:
1) Wells Fargo Special Metals Funds
Wells Fargo introduced the special metals portfolio in the name of “Wells Fargo Precious Metals Fund” (EKWAX) in 1998 to ensure long-term capital appreciation for the investors.
The fund manager invests more than 80% of the pooled assets in gold mining/exploration/and processing companies or in other companies dealing with gold or other precious metals to generate more than 50% of their revenues. The fund sometimes also invests up to 40% of its assets into the equity capital markets and up to 25% of its assets into debt securities markets. Any dividends or capital gains arising therefrom are distributed annually.
The EKWAX fund has 34 gold holdings in total that include Newmont Gold, Barrick Gold, B2gold, and Kinross Gold. The total portfolio asset for this fund stands slightly over $389 million whereas the net expense ratio stands somewhere around 1.09%.
2) Gabelli Gold Fund
The Gabelli Gold Fund or the GLDAX was issued by Gabelli Funds in 1994. The primary focus of this fund is long-term capital appreciation. To achieve this, the fund manager invested more than 80% of the fund’s total asset pool (together with any borrowed investment capital), into the U.S. domestic as well as foreign-issued equities of corporations, that are engaged in gold or gold bullion mining or processing. The total portfolio assets of the fund are calculated to be $256 million.
The expense ratio of the fund stands well above the average of most other mutual funds and is recorded to be 1.52. Top holdings for the GLDAX fund include Newmont, Barrick, Franco-Nevada, and Agnico Eagle Mines.
3) USAA Precious Metals and Minerals Fund
The USAA Precious Metals and Minerals Fund (USAGX) was issued by the USAA Group in 1984, with 2 primary objectives. The first is the common objective, that is long-term capital growth and the second one is protection against inflationary pressures. The total portfolio assets of the fund are $691 million.
The fund invests 80% of its assets into the various domestic and foreign companies of the US that are engaged in operations like gold mining, exploration, or processing of gold and other precious metals like diamonds, silver, platinum, etc.
The net expense ratio for the USAGX fund is 1.27%. The major portfolio holdings of the fund include Barrick, Kirkland, Newmont, and Kinross.
4) Fidelity Select Gold Portfolio Fund
The Fidelity Select Gold Portfolio Fund or the FSAGX was founded in 2006 by Fidelity Investments with a primary objective to provide long-term capital growth to the investors. To achieve this objective, the fund invests 80% of its total assets in the common stocks of corporations that are engaged in gold-related operations like gold mining, exploration, and processing of gold or gold bullion and coins.
However, the fund also makes investments in other precious metals and securities of businesses that distribute products, such as jewelry containing precious metals and minerals. The fund is invested in both foreign-issued stocks and U.S. domestic stocks.
The FSAGX Fund has a net expense ratio of 0.79, and total portfolio assets for the fund are recorded to be $2 billion. Some of the major holdings of the fund include Barrick, Franco-Nevada, Newmont, and Agnico Eagle Mines. The composition of the fund’s portfolio is primarily gold, with 92% of assets dedicated to gold, and 79% of assets invested in foreign equities.
5) The Invesco Oppenheimer Gold and Special Minerals Fund
The Invesco Oppenheimer Gold and Special Minerals Fund or the OPGSX came into being in 1983 to provide long term capital appreciation to the investors.
To achieve this objective the fund invests its total assets in the companies mining stocks or in the companies that are focused on gold or other precious metals mining or processing. The fund has a total assets portfolio of $1.9 billion, of which Gold makes up the majority of the portfolio (82% of assets) and a net expense ratio of 1.17%. The primary holdings of the fund include Kirkland, Newmont, Barrick, and Evolution Mining.
6) First Eagle Gold Fund
The First Eagle Gold Fund or the SGGDZ fund allows its investors to participate in the gold investment for a certain portion of their overall investment portfolio. To achieve this objective, the fund invests 80% of its net assets, including any borrowings for investment purposes, in gold or gold bullion securities or in companies that are directly related to operations in gold, like mining and processing of gold and gold-related securities. The fund is non-diversified.
How do Gold Funds work?
Gold funds pool investments from investors and invest them in ETFs that are run by AMCs (asset management companies). The Gold ETF managers then use the pooled investment to buy top-grade gold bullion that is represented in terms of units. These units are listed on stock exchanges where the investors can buy or sell the ETF units that lead to indirectly buying or selling physical gold.
Gold funds, just as physical gold, are taxed based on the capital gains that the investors make by selling the units and the total holding period. When you invest in a gold fund, you are actually investing in physical gold at the existing rate. Contrarily, when you redeem your units of the gold fund, you are actually selling physical gold at the prevailing rate. Therefore, if the price of gold at the redemption time is higher than that at the investment time, it means you have made capital gains on gold.
Gold mutual funds make returns by the movement of their underlying investment. Here, the NAV of gold funds changes according to the price of the ETFs, in which they are invested. A gold ETF’s price, in turn, moves according to the price of gold. Therefore, by investing in a gold fund, you can capture the movement of gold prices.
Investing in gold mutual funds also gives the investors options to earn good dividends. However, it is to be noted that a fund can pay dividends only out of its realized gains, that are from interest incomes or profit on selling stocks or dividend income on stocks or, etc.
Things to consider before investing in gold mutual funds
Here are certain things that you should consider before investing in gold funds.
Level of Returns
Pay attention to the level of returns that the mutual fund company is providing in comparison to physical gold. If the returns are somewhat similar or higher, it shows the efficiency of the AMC. Besides this, the average returns generated by other gold funds, as well as the expense ratio of your preferred gold funds also indicate a lot about the efficiency of the company. A low expense ratio allows investors to earn a higher rate of returns.
Use gold funds as a hedging tool
Gold performs well during uncertainties; therefore, it can be used as a hedging tool during inflation and then limiting your gold investments to a maximum of 10% of your total portfolio value. Your gold investments should also be dynamic, which means staying invested in gold during the high-risk period and then slowly shifting your investments to other better-performing assets when the risks fade.
Key differences Between Gold Funds and Gold ETFs
There is a thin line of difference between gold funds and gold ETFs. The bases of difference are discussed below:
The pricing policies for gold funds and ETFs are different. Gold funds units are priced on the basis of their NAV or the Net Assets Value, which is generally disclosed at the end of the trading hours. On the contrary, gold ETF is listed on the stock exchange, so investors can get real-time updates about their prices at any time during the day.
Investors can invest in gold ETF without having to pay any transaction costs whatsoever. But in the case of gold funds, there may be an exit load charged if the investors want to redeem their units within the predefined lock-in period.
The expense ratio in the case of gold funds is more than in gold ETF. This is because gold funds ultimately invest in gold ETF, and therefore, the expenses of the gold funds include the expenses of ETFs also, and hence the high expense ratio. The more the expenses in managing the funds, the more will be the fund’s expense ratio. A higher Expense ratio indicates that the fund is actively managed.
The minimum initial deposit amount in gold ETF depends on the price of gold that prevails in the market at a given point in time. Holding one gold ETF unit is equivalent to owning one gram of gold.
Investors can invest in gold funds through SIPs or a Systematic Investment Plan, which is one of the best ways to invest in mutual funds. Investing through a SIP gives immense benefits to many investors, like investments can be made in small amounts periodically, SIPs are not altered by the market fluctuations and therefore it helps many investors to budget expenses. Thus, SIP-based investment provides immense help to a layman who wants to invest in gold but does not understand the market much. Gold ETFs do not allow investors to invest through SIPs.
Mode of investments
As gold ETFs are listed on the stock exchange, investors can purchase gold ETF units from the stock exchange just as they purchase a unit of equity shares. On the contrary, as gold funds work like mutual funds, investors need to purchase gold funds units from the respective fund house.
As gold ETFs are listed on stock exchanges, they offer higher liquidity than gold funds. Also, as there are no exit loads charged for investing in ETFs, investors can buy or sell the gold ETF units at any time during the trading hours. On the contrary, gold funds units can be redeemed by selling them back to the fund house from where they were purchased based on the NAV (Net Assets Value) for that particular day.
Gold ETFs can be converted into gold metal whenever needed, whereas gold Mutual Funds do not give the investors such benefits. Due to this, they offer more flexibility to seasoned investors so that they can invest as per their convenience.
Final Verdict – Which is Better a Gold Fund or a Gold ETF
Therefore, both Gold Fund and ETFs are pooled investments that are managed by Mutual Fund Companies to help investors invest in gold asset classes electronically. Gold Mutual Funds pool assets from investors and then invest the pooled funds in ETFs that are floated by the same AMC (Asset Management Company) that manages the Gold Mutual Funds as well.
Gold ETFs units are equivalent to physical gold and offer more liquidity than gold mutual funds, which makes it a valid point when investing in gold. But the liquidity varies across various mutual fund companies. Therefore, before investing in an electronic form of gold, investors should be aware of the terms and conditions provided by the mutual fund company where they intend to invest. Also, unlike gold mutual funds, ETFs don’t have any exit loads, which allow the investors to buy or sell units at any time during the trading hours.
Thus, if you want to invest in a manner that tracks the prices of gold, then ETFs would be a better option for you as ETFs are exposed to physical gold, like gold bullion or gold futures. Whereas on the contrary, Gold mutual funds invest in the companies that mine or process gold. Its value fluctuates with the fluctuations in the market while for ETFs the value will fluctuate with the change in the value of the asset and not of the market. Therefore, the investor has to decide which one will be convenient for him and invest accordingly.
Again the fees may differ in gold ETFs and gold funds, even One ETF may have fewer fees than another, and even there can be a difference between 2 gold mutual funds. Therefore, investors should choose their investment options according to their portfolio and investment goals.
Are gold mutual funds a good investment?
Yes, Gold mutual funds have emerged to be a great way of investing.
Which is a better gold ETF or gold fund?
From the point of liquidity factor or transaction costs, ETFs are the best options as they offer more liquidity and also do not involve any transaction costs. But if you consider the expense ratio or SIPs, then gold funds appear to be the best, as they have less expense ratio than ETFs and also allow investment through SIPs or Systematic Investment Plan
Does Vanguard have a gold mutual fund?
No, Vanguard does not offer a pure gold fund, but it has a “ Precious Metals and Mining Mutual Fund” that provides investors access to the precious metals market.