A gold mutual fund is like a mutual fund backed by gold as the underlying asset and would be held mostly in demat form. An investor would get a securities certificate issued by the mutual fund running the Gold Mutual Fund defining the ownership of a particular amount of gold.
Gold Mutual Funds are designed to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell through trading of a security on a stock exchange.
With gold being one of the important asset classes, Gold Mutual Funds will provide a better, simpler and affordable method of investing as compared to other investment methods like bullion, gold coins, gold futures, or jewellery.
Advantages of Gold Mutual Funds:
1. No risk of holding physical stock: As Gold Mutual Funds are issued in demat form, the risk associated with holding physical gold is reduced considerably.
2. Affordable: Gold Mutual Funds are ideal for small retain investors as they can buy a just one unit from the exchange. The minimum amount of investment during the NFO period for Cash is Rs 10,000 and in multiples of Rs 1,000 thereafter. One unit of the fund will represent one gram of gold.
3. High Liquidity: Gold Mutual Funds can be easily bought / sold like any other stock on the exchange during market hours at real-time prices as opposed to end of day prices.
4. Lower cost: Gold Mutual Funds enjoy the benefits of lower cost and higher transparency. As they are listed on the exchange, costs of distribution are much lower.
5. Low tracking error: Tracking Error of Gold Mutual Funds is likely to be low as compared to a normal fund. Due to the creation / redemption of units only through in-kind mechanism the fund can keep lesser funds in cash. Also, time lag between buying / selling units and the underlying physical gold is much lower.
Working Mechanism of Gold Mutual Funds
Objective of Gold Mutual Fund is to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors.
Investment of Funds:
SEBI monitors the Investment criteria. Major part of the fund in the scheme is invested in Physical gold or gold related items as permitted by Regulators from time to time. Risk profiles in these kinds of Investments vary upon the Mutual Fund Scheme provided by the Company. SEBI has permitted only investment in Physical gold.
In terms of SEBI circular no. SEBI/IMD/CIR No.4/ 168230/09 dated June 30, 2009, no entry load will be charged by the Scheme to the investor effective August 1, 2009. Upfront commission shall be paid directly by the investor to the AMFI registered Distributors based on the investors' assessment of various factors including the service rendered by the distributor.
Returns to these kind of Mutual Funds are in the form of Dividends which may be paid by the companies as per their product scheme.
Investment can be made in the form of units. Minimum number of units to be purchased / traded is according to the company. One unit price is almost equal to price of one gram of gold.
Trading of Gold Mutual Funds:
Depending on the Companies providing the Schemes, these funds are traded in Bombay Stock Exchange and National Stock Exchange.
Disclaimer by Mutual Fund Companies:
Mutual funds usually claim that investment objective may not be achieved. Sponsor is not responsible for any loss or liability. The NAV of the Scheme may be affected by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. The Mutual Fund is not guaranteeing or assuring any dividends/ bonus.