Gold Funds: Advantages and risks of investing in gold funds

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July 19, 2021 3:38 PM

Buying physical gold attracts additional expenses such as making charges and GST on the overall purchase value, which exerts say could be avoided by investing in gold funds.

gold, gold ETF, mutual fund, June 2021, covid third wave, gold, silver, MCX gold, gold prices, gold rates, COMEX, equity, equity investment, mutual fund, MF, direct equities, Mutual Fund, MF, Exchange Traded Fund, ETF, risk, diversification, capital rquirement, taxation, Gold Mutual Fund, Gold ETF, Gold Mutual Fund vs Gold ETF, better investment option, gold, SIP, mutual fund investmentAs gold is not affected by credit and default risk, it is viewed as a safer haven and is considered a hedge against inflation.

Gold funds invest in various forms of gold, with maximum exposure to gold ETFs. They have passively managed funds, and the NAVs of these funds are aligned with the price of their underlying gold ETF.

As gold is not affected by credit and default risk, it is viewed as a safer haven and is considered a hedge against inflation. Experts say among traditional investments, one can invest in gold funds to stay ahead of inflation. Note that gold funds are not risk-free, however, the risks could be mitigated with a long-term investment horizon.

For instance, when there is uncertainty, the price of gold increases. Similarly, gold prices have appreciated consistently over the years, helping investors beat inflation.

Advantage of Investing in Gold Funds

Among the advantages of investing in a gold fund, having no additional costs is one of the biggest plus points. For instance, buying physical gold attracts additional expenses such as making charges and GST on the overall purchase value, which exerts say could be avoided by investing in gold funds.

Anyone can start small. For instance, the price of one gram of gold today stands at over Rs 4,500. With gold funds, one need not even but one gram of gold. Some investment platforms allow investment in gold funds with just Rs 100. Experts say it could be a smart and affordable way to include gold in an investor’s portfolio.

Along with that, as the investment in gold funds will be in the form of digital units, the investor will not have to worry about the safety and storage of the gold. One would also not need to have a Demat account to invest in gold funds.

What are the risks of investing in gold?

When seen in US dollars, gold is denominated and prices of gold are impacted as the dollar moves. For instance, the price of gold tends to fall in US dollar terms, if the dollar goes up against other currencies, at the same time, including the rupee it becomes more expensive in other currencies.

While investing in gold funds, one needs to ensure the genuineness and creditworthiness of the issuer. One could lose all his/her money, in case the issuer of the gold instrument issues the instrument without investing in gold.

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