Gold funds are mutual funds that implicitly or explicitly allocate funds to gold reserves. This type of mutual fund investment is directed towards physical gold, stocks of mining companies and gold-distributing and producing syndicates. Invest in gold funds if you want to allocate funds to an asset without purchasing the commodity in its physical form.

How do gold funds work?

A fund manager managing gold mutual funds first collects money from investors. Then, the pooled money is used for purchasing gold, or, sometimes, the fund manager allocates funds to the shares related to gold mining. Investors receive “units” after fund allocation.

The performance of underlying stocks is known for being different because of the varying prices of physical gold. Even a small change in gold’s global market price can cause substantially alter the returns in gold mutual funds. If you seek to diversify your mutual fund portfolio and lower investment risks gold funds might be helpful. That’s because they are regulated by the SEBI. All you need to do to invest in gold funds is to select the variant that suits your financial goals and plan.

What are the different types of gold funds?

The different types of gold funds are as follows:

1. Gold mining funds

As per its name, this variant of gold funds invests in businesses involved in gold mining. The returns are linked to the performance of the gold mining companies. The prices of gold also depend on the difference between supply and demand.

2. Gold ETFs (exchange-traded funds)

They are passive investment instruments that allocate funds to gold bullion. They are based on gold prices. These funds aim to track the price of the physical gold manufactured in the country. Fund managers managing these ETFs watch the varying gold prices and engage in physical gold trading accordingly. The fund’s units are sold in the exchange market, which makes them liquid for both sellers as well as buyers.

3. Gold FoF

Gold fund of funds or gold FoFs invest in different mutual fund schemes, including gold ETF assets. Gold FoFs require no Demat account, and it is easier to invest in them. Even if they don’t directly invest in pure physical gold, golf FoFs indirectly enjoy the benefits from the same assets as gold ETFs.

Key features between Gold ETFs and Gold FoFs

People generally get confused between Gold ETFs and Gold FoFs. Also, both variants are handled by big AMCs. Here are some of the key features in which Gold ETFs and Gold FoFs can be differentiated from each other:

• Pricing

The price of gold EFTs is driven by the international prices of gold. This makes gold EFTs transparent. Gold FoFs can include gold and other associated assets as well. Therefore, the NAV of Gold FoFs is dependent on the current value of those assets.

• Method Of Investment

Investments in Gold ETFs involve the stock exchange, for which you are required to create a demat account. On the other hand, Gold FoFs are offered by AMCs. Moreover, you don’t need to create your demat account for investing.

• Cost Of Transaction

Gold ETFs don’t have any exit or entry loads. However, Gold FoFs might have exit loads of at least a year.

Conclusion:

Gold funds invest in gold bullions, which are physical assets mostly independent of the fluctuations of the financial markets. This aspect makes a gold mutual fund suitable for conservative investors too. People looking for tax-saving options can also opt for gold funds as TDS is not applicable for gold fund investments. The only taxes applicable on these funds are on the purchase and sale of gold jewellery.