Gold as an investment is available in several forms. Some of these are gold bullions, gold futures, gold mining stocks, and gold mutual funds. The latter has emerged as a popular means of investment, considering that you can use it to diversify your portfolio or create a hedging strategy.
You can find everything about gold mutual funds here, including how it works, some available investment funds, and their advantages and potential returns.
What Is a Gold Fund?
A gold fund is an investment fund that holds gold-related assets. Most existing gold funds deal with gold bullion, futures contract, or securities of gold mining companies. It’s a popular investment vehicle among investors who want to hedge against inflation risks, falling currency prices, and stock market declines.
How Do Gold Mutual Funds Work?
This pooled investment vehicle often takes the form of an exchange-traded fund (ETF) or a mutual fund. In the case of mutual funds, you may access them through a commercial bank or another financial institution. On the other hand, you can buy an ETF directly on the stock market.
Mutual funds that handle gold tend to invest in gold-related securities, the most common one mining stocks. Overall, they’re a convenient way for investors to gain exposure to gold and diversifying their portfolios. They also allow them to avoid high insurance and storage expenses associated with physically owning gold bullions.
Each gold mutual fund has a fund manager who picks an investment that helps it accomplish its objective. In most cases, the returns of a gold fund closely match those of a gold ETF. Moreover, a fund’s net asset value is often affected by the overall price changes of gold in the market.
How Are Gold Funds Different from Gold Exchange-traded Funds?
The pricing of gold fund units is different from those of gold ETFs. You can see their price by looking at their net assets. A fund discloses these once the trading hours end. Meanwhile, you can see the cost of gold ETFs directly on the stock exchange. As market forces dictate its value, it may have a higher price than its net assets. However, the opposite also applies.
Type of Management
A fund’s management type can influence your costs and total returns. Both gold funds and ETFs have an overseeing manager, but the applied method is different. Some engage in active management, where the fund manager chooses when to buy and sell gold assets. It’s the standard type in a gold mutual fund.
The other approach is passive management, where the fund manager doesn’t select investments. Instead, they mimic an already chosen index, such as the S&P 500. This approach is typical of gold ETFs, but occasionally they’re also actively managed.
This ratio indicates how much an investor pays each year to the fund. It’s reflected as a percentage of the amount they invest. Most passively managed gold ETFs are relatively inexpensive compared to gold mutual funds. While it’s easy to find gold ETFs with expense ratios around 0.40%, most mutual funds’ ratios are around 1.00%
Some gold mutual funds have high entry costs. It isn’t rare to find several with a minimum of $1,000 or more. However, some have a minimum of zero. These give you total freedom regarding the amount you want to invest.
Meanwhile, many ETFs only require the purchase of a single share. Some even allow you to acquire fractional ones. Regardless, it varies by funds for both cases. You may occasionally get better deals if you agree to certain conditions.
Due to their management and structure, ETFs are generally more tax-efficient than gold mutual funds. When investors buy an ETF, they don’t pay taxes on capital gains until they eventually sell the shares for a profit.
On the other hand, mutual funds purchase and sell gold assets more frequently due to their active management. When it’s for gains, the fund passes the taxes to everyone with shares within it, even if the investor has never sold one.
Advantages of Investing in Gold Mutual Funds
The main advantages of investing in gold mutual funds derive from it being a fixed asset. There’s good demand for it, and as such, its price has short-term fluctuations. However, it tends to rise in value over time. Other advantages you may find are:
Gold is a very liquid asset. You can convert it to cash on short notice without much hassle. Many investors run to it and other precious metals during investing crises as they tend to retain their value, making them a remarkable financial cushion. All you have to consider are the fees related to selling. Also, note that gold mutual funds only execute transactions once each day when the fund’s net assets are calculated.
Fair Pricing and Convenience
It’s easy to purchase and understand gold funds. Some have relatively low minimum investments, and as they only trade once, there’s no fluctuation nor traders practicing arbitrage opportunities. They’re also electronic investments, so you don’t have to deal with the hassle of physical gold.
Excellent Diversification Option
Due to their liquidity and convenience, many investors opt for a gold fund to diversify their portfolios and reduce market risk. As a physical asset, the price of gold isn’t directly related to company stocks, so in most scenarios, you can assure a return even when every other asset class is performing poorly. However, it may not be ideal for investors with a small to medium portfolio as most fund’s annual total return tends to be low.
Every mutual fund, including gold ones, includes a management fee as part of the expense ratio. They use it to hire a manager who buys and sells stocks aligned to the fund’s goal. The cost is relatively small, considering you receive a professional fund manager with a good deal of knowledge and strategies related to gold investments.
Top Available Gold Funds for Investment
As mentioned, most mutual funds that deal with gold and precious metals focus on mining stocks, but some allocate a certain amount to gold bullion. These funds span the globe, but most major firms have headquarters in the United States, Australia, and South Africa. Here are some of the best gold funds available for investment.
First Eagle Gold Fund (SGGDX)
This fund’s goal is to provide all of its investors with an opportunity to add gold investments to their portfolios. Of course, it invests at least 80% of its assets and borrowings into gold and other related securities to achieve this purpose. These include gold mining finance and operating companies with short, medium, or long-life mines.
It has a high expense ratio of 1.21% and a five-year total average annual return of 20.99%. The fund’s assets are $2.27 billion, and it requires a high investment of $2,500. Many investors consider the First Eagle Gold Fund one of the safest options available, and its low Morningstar risk rating backs it. It has holdings in Newmont, Barrick, Wheaton Precious Metals, and Royal Gold, among others.
Invesco Gold & Special Minerals Fund (OPGSX)
This fund seeks capital appreciation. It primarily invests in stocks of companies that process, mine, or deal with gold. The fund has minor dealings as well with gold bullion, precious metals, and minerals. Under normal conditions, it invests around 80% of its assets into these securities, including derivatives and other instruments with similar characteristics.
It has a high expense ratio of 1.20%, an astounding five-year average annual return of 41.75% as of recent data, and an average risk rating. The fund’s assets are $2.29 billion, and it requires an investment of $1,000. It has holdings in Newmont, Northern Star Resources, AngloGold Ashanti, Evolution Mining, and Gold Fields.
Fidelity Select Gold Portfolio Fund (FSAGX)
Fidelity Investments established the Fidelity Select Gold Portfolio Fund in 2006 to provide its investors with capital appreciation. Its fund manager invests at least 80% of the fund’s assets in the shares of corporations that participate in gold-related operations, including gold bullion and coins. The fund also invests in precious metals such as silver, platinum, diamonds, and other instruments connected to them to a lesser degree.
The Fidelity Select Gold Portfolio Fund has a low expense ratio of 0.76. Its five-year average total return is 14.91%, and the fund’s total assets are $1.506 billion. Moreover, it doesn’t have a required investment. Its holdings include Newmont, Franco-Nevada, Barrick, Agnico Eagle Mines, and Kirkland. Furthermore, it has a below-average Morningstar risk level. The fund has investments in both U.S and other foreign-issued stocks.
Wells Fargo Precious Metals Fund (EKWAX)
Wells Fargo established this precious metals fund in 1998, and its primary goal is long-term capital growth. The fund’s manager tries to accomplish this objective by investing more than 80% of the fund’s assets in companies that actively partake in the exploration and processing of gold. It may also back some that generate at least half their revenue from such business and others that deal directly with gold and various precious metals.
This fund may invest up to 40% of its total assets into emerging market economies and 25% in securities of companies that deal with these metals. It has an expense ratio of 1.09% and a five-year average annual total return of 12.25%.
The total net assets of this portfolio are a little over $363 million, and it requires an investment of at least $1,000. Additionally, its risk is below average, and it has holdings in Newmont, Kinross, Barrick, and Kinross Gold.
Sprott Gold Equity Fund (SGDLX)
This fund was established in 1998 with the goal of long-term capital appreciation. Its managers seek to achieve this by investing at least 80% of its assets and other borrowings into gold-related securities in emerging and developed markets.
This equity fund may also invest in gold bullion and precious metals such as silver and platinum. However, the fund doesn’t direct more than 20% of its assets toward these.
It has a pretty high expense ratio of 1.39%, a five-year average annual total return of 11.57%, and a minimum investment of $1,000. The fund’s net assets are $1.09 billion, and it has holdings in Corvus Gold, Osisko Gold Royalties, Kirkland Lake, Newmont, and many others. Its risk rating in the equity precious metals category is among the lowest.
Franklin Gold and Precious Metals Fund (FKRCX)
Like others, this fund seeks capital appreciation by investing 80% of its assets into the shares of companies worldwide that mine, process, or deal in gold and precious metals such as silver and platinum. Its secondary objective is to provide current income through the interest of its investments or dividends.
It has a 0.93% expense ratio and a five-year total average annual total return of 23.31%. The fund’s net assets are $1.29 billion, and it requires an investment of $1,000. It has holdings in Endeavour Mining, Barrick, Newmont, Alamos Gold, and B2Gold.
Gabelli Gold Fund (GLDAX)
This fund normally invests 80% of its assets into equity securities of domestic and foreign companies that engage in gold-related activates and gold bullion. Its manager focuses on undervalued stocks that have favorable long-term growth prospects. The fund expects to invest a considerable portion of its assets into foreign issuers, even those in emerging markets.
It has the highest expense ratio yet at 1.48% and a five-year average total return of 15.38$. The fund’s assets are over $396 million, and it has a $1,000 investment requirement. It has holdings in Newmont, Franco-Nevada, Barrick, and Endeavour Mining.
What You Should Consider as an Investor
Unlike other equities, gold doesn’t offer high returns bar some exceptions. Most investors flock to it by the necessity of having a haven during a market crisis as it’s an excellent inflation hedge. Others have concerns about expansionary monetary policies, chronic trade deficits, high levels of government borrowing, and other factors that could cause the value of the U.S. dollar to decline.
Overall, gold isn’t a bad asset class, but it isn’t the best long-term option to generate wealth long-term. Try to avoid using it as a timing tool or as your sole investment vehicle. Most asset allocation and portfolio diversification strategies recommend investing a bit into it during depressions and switching to other assets once the market recovers.
Additionally, as these have fund managers, you have a small role to play. You can limit yourself to calculating your budget and selecting your ideal option.
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