Investing in Gold Mutual Funds? Things to keep in mind

Gold has more to itself just its aesthetic beauty or cultural value. There are numerous benefits of investing in the yellow metal. Such as:

1. There is a strong demand for metal globally

2. It acts as a hedging instrument against financial market risks

3. Due to its low co-relation with asset categories (for example equity and debt), gold acts as a good diversifier for the overall portfolio. One great example is during the economic crisis in the year 2008. While the CNX Nifty fell by 52%, the value of gold went up by 28%.

4. Diversification through investment in Gold can also help in offsetting the impacts of inflation

However, the traditional way of investing in Gold (through gold bars or jewellery) has a lot of drawbacks. There are hidden charges such as storage costs, making and wastage fees. Additionally, they tend to diminish in value due to wear and tear. All these additional expenses bring down the net return from gold as an investment.

A new (and wiser) way to invest in the yellow metal is through the Mutual Fund route. Gold Mutual Funds invest in Gold ETFs. They seek to create wealth by capitalizing on the potential of the underlying commodity i.e. gold.

Here are some things to keep in mind while investing in Gold Mutual Funds

1: The main objective should be diversification

Investment in Gold Mutual Funds should be for the primary reason of diversification. It can help to hedge risks and steady the portfolio, especially during downtime. This was proven well during the crisis of 2008. If you are looking for exceptional returns, then Gold may not be your best bet.

2: Limit the exposure

Most market experts are of the opinion that you should restrict your investment in Gold Mutual Funds to maximum 10% of the portfolio. Anything more than that might be counter-productive as it may drag down the overall returns in a growing market.

3: Not for everyone

Should you invest in Gold Mutual Funds because the gold prices are on an all-time high? The answer is a clear no. You should only invest in these funds if you truly need to diversify the portfolio. Small or conservative investors may not need this level of diversification. Their focus should be on fulfilling their financial goals and optimizing their returns, rather than assuming unnecessary risks.

If you are keen to invest in Gold (minus the hassle of storage, safety or even Demat Account which is required for Gold ETFs), Gold Mutual Funds can be a good ally. Here is a quick overview of the best Gold Mutual Funds available in the Indian market:

Final Words

When done properly (i.e. with the required due diligence), investment in Gold Mutual Funds can prove to be a great decision. Especially, when the markets are rough, this investment will keep the shine alive in your portfolio.