Precious Metals

Should You Invest in Gold Mutual Funds?10 min read

Sep 8, 2021 7 min
Gold ETFs

Should You Invest in Gold Mutual Funds?10 min read

Reading Time: 7 minutes

Including gold funds in your investment might help you diversify or establish a hedging strategy. Gold can be used as a hedge against inflation, stock market falls or decreasing currency prices, particularly when compared to the US dollar.

For many years, gold has been used as a currency. It has held value throughout history. Various techniques of investing in gold can result in a sizable reward. Gold hedge funds, an exchange-traded fund, gold-backed securities, gold mining stocks, gold mutual funds, and gold futures are all available.

Gold Mutual Funds or Gold ETFs?

If you want to invest in gold in a way that tracks its prices, you can buy gold ETFs (known as an exchange-traded fund) that are susceptible to it, such as bullion, or trade gold futures. Gold mutual funds frequently invest in gold mining enterprises. One distinction between these two types of accounts is that the mutual fund moves with the market and the company’s worth, but the ETF moves with the price of gold.

The characteristics of both of these options lead to the selection of the one that is best for your portfolio and investment objectives. Because gold prices are frequently more stable than stock prices, the ETF might be used as a hedge against inflation, a market drop, or a decrease in the value of mining company shares.

What Is Gold Mutual Fund?

The corpus of a gold mutual fund is invested in gold exchange-traded funds (ETFs). The goal is to mimic the volatility of domestic gold prices. It is a mutual fund of funds that are actively managed (FoF).

Gold mutual funds offer the additional advantage of expert portfolio management as well as the ability to hold actual gold. One gram of actual physical gold is equal to one unit of the gold fund.

These funds are extremely popular during times of political unrest or when stock markets are in decline. They are vastly liquid because they invest in gold ETFs.

How Are Gold MFs Taxed?

Gold mutual funds are taxed based on the number of capital gains realized and the length of time held. If you hold the fund for fewer than three years, the capital gains can be taxed at your marginal tax rate. Furthermore, if you’ve owned the gold fund for at least three years, you must pay tax on the capital gain at a rate of 20%, with indexation advantages.

Top Five Precious Metals Mutual Funds

1. Wells Fargo Advantage Precious Metals Fund

The primary purpose of this fund is long-term capital growth, and it is a way to go about investing in gold.

The fund’s manager, Michael P. Bradshaw, seeks to achieve this goal by typically investing 80 percent or more of the fund’s assets in businesses that actively engage in gold exploration, mining, and processing, companies that deal in gold and other precious metals, and mineral deposits, or businesses that generate at least half of their total revenue from such activities. This precious metals fund may invest up to 40% of its assets in gold mining stocks from developing market nations and up to 25% in metals-related debt securities. Dividends and capital gains are paid out every year.

This fund’s net expense ratio is 1.09 percent, which is higher than the average for similar funds. The fund’s five-year total return is 11.5 percent. This fund’s entire portfolio assets are somewhat more than $389 million.

In terms of the fund’s overall risk, it is regarded as slightly above average. Barrick Gold, Newmont, Kinross Gold, and B2Gold are among the fund’s largest holdings. It has 34 holdings altogether.

2. Fidelity Select Gold Portfolio Fund

Fidelity Investments launched the Fidelity Select Gold Portfolio Fund (FSAGX) in 2006. The primary goal of this precious metals fund is to deliver capital appreciation to investors.

Under typical conditions, financial adviser Steven Calhoun invests at least 80% of the fund’s total assets in ordinary shares of companies involved in various sorts of gold-related activity, as well as physical gold bullion and coins. Investments are also made in additional precious metals, instruments whose value is linked to the price of precious metals, and stocks of companies that produce products using precious metals and minerals, such as jewelry. The gold fund invests in both local and foreign-issued companies in the United States.

The net expense ratio of the Fidelity Select Gold Portfolio Fund is 0.79 percent. The fund’s five-year average total return is 11.67 percent and the total portfolio assets are $2 billion. This gold fund is considered to have an above-average risk level. The portfolio’s makeup is predominantly gold-related, with 92 percent of assets committed to the metal and 79 percent invested in international equities.

3. Gabelli Gold Fund

Gabelli Funds launched the Gabelli Gold Fund (GLDAX) in 1994. The primary goal of the fund is long-term financial growth.

Caesar Bryan, the fund’s manager, achieves this goal by investing 80 percent or more of the fund’s total assets, as well as any borrowing investment capital, in U.S. domestic and foreign-issued equity shares of mining companies or those active in gold-related activities, as well as in gold bullion. The gold fund’s portfolio assets amount to $256 million.

The Gabelli Gold Fund has a gross expense ratio of 1.52 percent, which is significantly higher than the average for equivalent precious metals funds. This gold fund’s five-year average annual return is 0.74 percent. The risk level of this mutual fund is above average.

4. USAA Precious Metals and Minerals Fun

The USAA Precious Metals and Minerals Fund (USAGX), which was established in 1984 by the USAA Group, has two principal investment goals: long-term capital appreciation and the protection of buying power against inflation.

Mannik Dhillon, the fund’s manager, aspires to achieve these goals by investing at least 80% of the fund’s assets in foreign and domestic firms providing primary operations in the discovery, mining, or processing of gold, silver, platinum, diamonds, or other precious minerals.

The USAA Precious Metals and Minerals Fund has a net expense ratio of 1.27 percent. The fund’s average yearly total return over the last five years has been 10.55 percent and it is categorized as having a higher-than-average risk.

5. Invesco Oppenheimer Gold and Special Minerals Fund

The Invesco Oppenheimer Gold and Special Minerals Fund (OPGSX) was established in 1983 with the goal of long-term capital growth.

Shanquan Li, the fund’s manager, invests in the equities of mining firms centered on gold and other precious metals. The gold fund has a net cost ratio of 1.17 percent and $1.9 billion in assets. The fund’s average annual return over the last five years has been 12.49 percent.

At 82 percent of assets, gold constitutes the majority of the investment. When compared to other funds in its category, the fund has an above-average rating.

Mutual Fund Fees and Expenses

Running a mutual fund incurs costs, just like any other business. There are fees associated with specific investor transactions, such as investor purchases, exchanges, and redemptions. Regular fund operation costs that are not necessarily related to any given investor transaction include investment advising fees, publicity and distribution expenses, brokerage fees, and custodial, transferring agency, lawyers, and accountants’ service charges.

Some funds pay the expenses of a specific investor’s transactions and account by charging fees solely to the investor at the time of the transactions (or periodically for account fees). These service charges are listed in the fee table, which may be found near the front of a fund’s documentation under the heading “Shareholder Fees.”

Rather than charging individual fees on investors, funds generally pay their regular and recurrent fund-wide operational expenditures out of fund assets.

Why Invest in Gold ETFs and Gold Mutual Funds

Investing in gold ETFs and mutual funds can give you exposure to gold’s long-term security while also providing more liquidity and diversity than individual gold stocks. Gold funds come in a variety of shapes and sizes. Some are passively managed index funds that use futures or options to track industry trends or the price of bullion.

The SPDR Gold Shares ETF (GLD), for example, invests in actual gold as well as deposit receipts, and its value is linked to the price of physical bullion. VanEck Vectors Gold Miners ETF (GDX) is a passively managed product that follows an underlying basket of gold mining and processing equities.

Remember that you are not purchasing gold, but rather paper that is theoretically secured by debt or equity of mining firms, or futures and options agreements for genuine gold bullion. This means that the value of gold mutual funds and ETFs may not completely reflect the market price of gold, and these assets may not operate as well as physical gold.

Good Reasons to Own Gold

A History of Holding Its Value

Unlike paper cash, coins, or other assets, gold has retained its worth over time. People perceive gold as a means of transferring and preserving riches from one century to the next. People have treasured the special characteristics of precious metals since antiquity. Because gold does not rust and can be melted over a standard flame, it is simple to deal with and stamp as a coin. Furthermore, unlike other elements, gold has a distinct and lovely color. The atoms in gold are heavier, and the electrons move quicker, causing some light to be absorbed; a process that required Einstein’s theory of relativity to work out.

Inflation Hedge

Gold has historically been a great inflation hedge since its price rises when the cost of living rises. During high-inflation years, gold prices have skyrocketed while the stock market has plummeted over the last 50 years. This is because when Fiat currency lacks purchasing power due to inflation, gold is priced in those currency units and consequently rises along with everything else. Furthermore, gold is seen as a good store of value, thus individuals may be urged to purchase gold if they perceive their country’s currency is dropping in value.

Deflation Protection

Deflation is characterized as a period when prices fall, economic activity slows, and the economy is overwhelmed by heavy debt, which has not occurred internationally since the 1930s Great Depression. During the Great Depression, gold’s comparative buying power skyrocketed as other prices plummeted. This is because people opted to hoard cash, and the best place to keep the currency at the time was in gold and gold coin.

Geopolitical Uncertainty

Not only can gold keep its worth in times of financial instability, but also in times of geopolitical upheaval. It is sometimes referred to as the “crisis commodity” because when global tensions mount, people run to its relative safety; during such times, it frequently outperforms other assets. Gold prices, for example, saw some significant price fluctuations this year in response to the European Union’s issue. When trust in governments is weak, the price of gold often climbs the greatest.

Increasing Demand

In past years, rising affluence in developing market nations fueled gold fund demand. Gold is deeply ingrained in the cultures of many of these countries. Gold has been in high demand in China, where gold bars are a traditional form of savings. India is the world’s second-biggest gold consumer; it is used for a variety of purposes, especially jewelry. As a result, the Indian wedding season in October is generally the moment of the year when global demand for gold is greatest.

Investors’ demand for gold has also increased. Commodities, particularly gold, are increasingly being viewed as an investment class into which funds should be put. As of 2019, SPDR Gold Trust was one of the biggest ETFs in the United States, as well as the world’s largest buyer of gold bullion.

The Bottom Line

Gold should be a significant component of a well-diversified investment portfolio since its price rises in response to circumstances that lead the value of paper investments, such as stocks and bonds, to fall. Although the price of gold can be erratic in the short term, it has always preserved its value over time. It has functioned as a buffer against inflation and the depreciation of world currencies over the years, making it an investment highly worth considering.

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