Gold Funds: Worth Your Investment?

Gold funds are a type of mutual fund that can be used to diversify investment portfolios and lower the risk of investment. They are ideal for investors who want to invest in gold without holding the physical commodity. Gold funds can also be used as a hedge against economic shocks and market fluctuations. The primary aim of investing in gold funds is to generate wealth and create a cushion against market volatility. Gold funds are regulated by market regulators and are taxed similarly to gold jewellery, depending on the investment duration. While gold funds offer lower returns compared to equities, they can provide higher returns during market collapse.

Gold funds vs physical gold

Gold funds and physical gold are two very different ways to invest in gold, each with its own advantages and disadvantages.

Gold Funds

Gold funds are a way to invest in gold without holding the physical asset. These funds may be in the form of mutual funds or exchange-traded funds (ETFs). The value of gold funds is typically tied to the price of gold, with their value tracking the price of the precious metal. Gold funds are seen as a safe haven to balance the exposure of a portfolio, particularly when the value of currency decreases. They are also a good way to diversify a portfolio as gold is not correlated with stocks, bonds, or real estate.

Gold funds are easy to trade, with shares able to be bought and sold quickly online. They also don't come with the same storage concerns as physical gold, nor the same costs, as investors don't need to pay for secure storage or insurance. Gold funds are also professionally managed, which can be beneficial for those less familiar with the gold market.

However, gold funds do come with management fees, which can eat into overall returns. They also don't offer direct ownership of gold and there is a risk of counterparty risk and the fund failing to properly track the price of gold.

Physical Gold

Physical gold offers direct ownership and complete control of the asset. It is a tangible asset that can provide a sense of security during economic downturns. Physical gold is also highly liquid and can be sold at any time.

However, physical gold comes with practical challenges, including the need for secure storage and insurance. There are also costs associated with buying physical gold, including dealer commissions, sales tax, and potentially higher dealer markups. The authenticity of physical gold also needs to be verified, and there may be challenges in finding a buyer when it comes time to sell.

Both gold funds and physical gold offer investors a way to add gold to their portfolio, with each having pros and cons. Gold funds are more liquid and come with lower costs, but they don't offer direct ownership of gold and come with management fees. Physical gold, on the other hand, offers direct ownership and is highly liquid, but it comes with practical challenges and costs relating to storage, insurance, and authentication.

Ultimately, the decision to invest in gold funds or physical gold will depend on the investor's financial goals, risk tolerance, and overall investment strategy.

Gold as a hedge against inflation

Gold is widely viewed as a hedge against inflation, and it has been used as a store of value for thousands of years. Gold's value increases as the purchasing power of the dollar declines. It is also seen as a safe-haven asset during economic downturns, and its price often moves independently of stocks and bonds, making it a good portfolio diversifier.

Gold's ability to act as a "store of value" can help investors mitigate risk during times of market volatility and economic uncertainty. For example, during the Covid-19 pandemic market sell-off in early 2020, the S&P 500 declined 23% while the price of gold dropped less than 0.1%.

Gold's value is also influenced by other factors, such as supply, investor sentiment, and other commodity market dynamics. For example, gold's performance as a hedge against inflation has been mixed over the past few decades. While gold generated an impressive 35% annual return during a period of high inflation in the 1970s, its performance since that time has been lacklustre. From 1980 to 1984, for instance, annual inflation averaged 6.5%, but gold prices fell by 10% on average each year.

Gold also has some drawbacks as an investment. It can be volatile and may not provide the high returns of more speculative assets. Additionally, holding physical gold can be costly and requires secure storage.

Overall, gold can be a prudent addition to a well-diversified portfolio, especially during periods of economic uncertainty and high inflation. However, investors should carefully consider the risks and weigh them against the potential benefits before investing in gold.

Gold funds as a safe haven

Gold has been considered a safe-haven investment for millennia. In ancient Rome, gold was used to pay centurions, and its value today remains comparable. In the modern economy, gold is still seen as a store of value and a hedge against inflation.

Gold's value is not impacted by interest rate decisions made by governments, and it has historically maintained its value over time. As such, gold is viewed as a form of insurance against adverse economic events. During times of economic uncertainty, investors may pile their funds into gold, driving up its price.

Gold is also a good diversifier, as its price tends to move in a different direction from other assets such as equities. In times of economic uncertainty, gold is considered impervious to the actions of centralised institutions.

However, gold is not a perfect safe haven. It can be volatile, and there is no guarantee that its price will increase during a market downturn. For example, gold prices declined over 30% during the 2008 financial crisis.

There are several ways to invest in gold, including:

• Exchange-traded commodities (ETCs)
• Physical gold, such as bullion, coins, or jewellery
• Shares in gold mining companies
• Gold funds, which invest in a portfolio of gold mining companies

Gold funds vs equities

Gold funds and equities are two very different types of investments, each with its own advantages and disadvantages. Here are some key points to consider when comparing gold funds vs. equities:

Gold Funds

Gold funds offer investors a way to gain exposure to the gold market without having to deal with the complexities of owning physical gold. Gold funds can be in the form of exchange-traded funds (ETFs), mutual funds, or even stocks in gold mining companies. Here are some advantages of investing in gold funds:

• Diversification and Hedge Against Inflation: Gold has a low correlation with other asset classes like stocks and bonds, making it a good diversification tool. Historically, gold prices tend to rise when the stock market and bond yields fall, making it a hedge against inflation.
• Professional Management: Gold funds are typically managed by investment professionals who make informed decisions on behalf of investors, which can be beneficial for those less familiar with the gold market.
• Lower Costs: While gold funds charge management fees, these expenses are generally lower than the combined costs of buying, storing, and insuring physical gold.
• Liquidity and Ease of Trading: Gold funds can be bought and sold quickly and easily on the stock market during trading hours, providing higher liquidity compared to physical gold.

However, there are also some disadvantages to consider when investing in gold funds:

• No Direct Ownership: With gold funds, you are investing in gold indirectly. The physical gold is held and managed by professionals on your behalf, so you don't have possession of the gold yourself.
• Counterparty Risk and Tracking Errors: Gold funds are subject to counterparty risk, and there is a possibility that the fund may not properly track the price of gold, leading to tracking errors.
• Annual Fees: Gold funds charge annual management fees, which can affect overall returns, especially if the fees are high.
• Tax Implications: The tax treatment of gold funds can be complex and may differ from that of physical gold, depending on the fund's structure and the investor's tax situation.

Equities (Stocks)

Equities, also known as stocks or shares, represent part ownership in a company. Investing in equities offers the potential for capital appreciation and dividend income. Here are some advantages of investing in equities:

• Potential for Higher Returns: Equities have the potential for substantial capital appreciation, especially during market rallies. Well-chosen stocks can offer exciting surges in value, as seen with Tesla stock, which appreciated by 3,500% in just over two years.
• Diversity of Choice: The stock market offers a vast range of sectors and companies to invest in, providing investors with great flexibility and the opportunity to gain exposure to specific areas of interest.
• Income Generation: Some companies pay dividends, providing a regular income stream to shareholders. This is an advantage over gold, which does not generate any income.
• Liquidity and Trading Ease: Stocks can be easily bought and sold through online brokers, providing a level of liquidity that allows for quick conversion to cash.

However, there are also several disadvantages and risks associated with investing in equities:

• Market Volatility and Fluctuations: The stock market is highly dynamic and volatile, with short-term fluctuations that can test the nerves of investors.
• Company-Specific Risks: Investing in individual stocks brings company-specific risks. If a particular company faces challenges or underperforms, your investment could be negatively impacted.
• Higher Risk: Equities are generally considered riskier than gold, as they are subject to market and company-specific risks. The potential for higher returns comes with a higher level of risk.
• Tax Implications: Dividend income from stocks is taxable, and capital gains tax may apply when stocks are sold at a profit.

Both gold funds and equities have their strengths and weaknesses, and the choice between the two depends on the investor's financial goals, risk tolerance, and investment horizon. Gold funds offer diversification, professional management, and a hedge against inflation, but may have higher fees and provide indirect ownership. Equities provide the potential for higher returns and income generation but come with higher risk and volatility. Ultimately, a balanced portfolio may include both gold funds and equities, with the allocation determined by the investor's specific circumstances and objectives.

Gold funds: long-term investment

Gold funds are a type of mutual fund that can be used to diversify portfolios and lower the risk of investment. They are ideal for investors who want to invest in gold as an asset without holding the physical commodity. The funds can also be used as a hedge against economic shocks.

The primary aim of gold funds is to generate wealth during the investment tenure and create a cushion against market fluctuations. Gold funds are regulated by market regulators, such as the Securities and Exchange Board of India (SEBI), which lowers the risk associated with investing in a mutual fund. The funds are also insulated from financial market fluctuations, making them relatively stable and attractive to conservative investors.

Gold funds are taxed similarly to gold jewellery and depend on the investment duration. If the tenure is less than three years, it is considered a short-term investment, and the revenue is added to the investor's gross income to calculate tax. For long-term investments of more than three years, gold funds are taxed at 20%.

While gold funds can be a prudent choice for investors, it is important to note that they offer lower returns compared to equities. Therefore, gold may not be a long-term option for wealth creation for many investors. It gives relatively higher returns only during periods of market collapse.

When considering gold funds as a long-term investment, it is essential to weigh the benefits of diversification and stability against the potential for lower returns. Consulting with a qualified financial advisor can help individuals make informed decisions about investing in gold funds based on their financial goals, risk tolerance, and overall investment strategy.

Frequently asked questions