Gold funds provide an efficient way to invest in gold as they remove the hassles of physical gold like storage concerns and purity issues. However, gold is a volatile metal and returns from gold funds largely depend on price movements which are difficult to predict. Read on to find out if gold mutual funds are the right investment for you.
Understand how gold funds work
Gold funds invest in physical gold or gold ETFs to generate returns corresponding to gold price movements. They provide a convenient way to invest in gold without the hassles of storage and purity concerns. The fund manager handles the operational aspects like buying, selling and securing the gold. You simply invest money, like in other funds, and the NAV moves based on gold prices to reflect returns.
Determine your need for gold in your portfolio
Gold is considered a hedge against inflation and market volatility. Gold funds may be suitable if you want to diversify risk in your portfolio, protect purchasing power or benefit from increasing gold demand over the long term. However, if short term gains are your priority or you have moderate risk appetite, larger allocations to equity and debt may be better. Assess your investment objectives, current assets and risk tolerance to decide how much gold fund exposure suits your needs.
Compare returns across funds for best option
Returns from gold funds depend on the underlying gold prices and the fund’s expense ratio. Compare yearly returns of gold funds over the longest period available to choose a consistent top performer. Also, check the expense ratio – prefer a lower expense fund as your money is invested in physical gold, and higher fees reduce returns. For example, a 1% lower expense ratio can mean around Rs. 100 higher returns on Rs. 10,000 invested each year.
Timing entry and exit needs caution
While gold prices may rise over long periods, short-term volatility is high. Timing investments in gold funds is difficult. Choose a passive buy-and-hold strategy through SIPs over timing the market. Stay invested for at least 5-7 years to minimize the impact of price fluctuations. Exit only if gold is overweight in your portfolio or you need money – do not exit based only on ups and downs. SIPs also help benefit from rupee cost averaging where you acquire more units when gold prices are low, benefitting more when they rise.
Continuously monitor the investment rationale
Review your reason for investing in gold funds periodically. If the rationale is protection from volatility or high inflation, check if these concerns remain and adjust exposure. If gold prices have risen substantially, book partial profits to maintain optimal allocation. Exit only if the investment objective that warranted gold fund exposure no longer exists, or if returns from other assets now favor exiting. Frequently monitoring why you chose to invest in gold funds in the first place helps ensure an optimal and meaningful allocation.
With the right perspective and discipline, mutual funds may enhance your investment outcomes and stability over time. But invest only as much as genuinely needed – gold offers volatility too, so make it a part and not the focus of your financial plan.