When is the Good Time to Invest in Gold Mutual Fund

Introduction:

One of Varun's investments matured recently. He wanted to keep this corpus as a financial cushion against the other market investments he had. Keeping this in mind, he decided to invest a part of this corpus in gold. But the question here was, what can be a suitable form of gold investment? Gold ETF, physical gold or gold mutual funds? He opted for gold mutual funds keeping in mind the combined benefits of gold investment and mutual fund expertise. But is there a suitable time for investing in gold mutual funds? Let's understand from the very basics of gold mutual funds.

What are gold mutual funds?

Gold mutual funds are open-ended mutual funds that invest primarily in gold ETFs and have a net asset value (NAV) that is linked to the performance of the underlying gold ETF. To earn a return, gold ETFs invest their funds in 99.5 per cent pure gold bullion. As a result, change in gold prices impacts gold ETFs, which plays a critical role in the performance of the gold mutual fund. Each gold fund would have a fund manager who would make investment decisions based on the fund's pre-declared objectives.

Additional read: ICICI Direct- Types of mutual funds

The answer to 'when to invest in gold mutual funds?' lies in understanding the different factors that affect the price of gold-

Factors determining the fluctuation in gold prices:

1. Equities and gold are said to have a negative correlation. That is, when the stock market falls due to a slowing economy or, in disaster situations such as a global pandemic, investors turn to gold for more security. In the current market, this is understandable. Most investors exited equity and entered gold funds to protect their portfolios from the pandemic and lockdown situations across the globe.
2. Gold and dollar have an inverse relationship. When the value of dollars falls, the price of gold rises, and vice versa. Because gold prices are denominated in dollars worldwide, any weakness in the greenback boosts the value of other currencies. As a result, demand for gold rises, causing gold prices to rise.

So, as we understand the factors that impact the movement of gold prices (consequently gold mutual funds' NAV), let's examine the appropriate gold mutual fund investment.

How much and when to invest in gold mutual funds?

During times of market volatility, gold acts as a hedge in your portfolio. It cannot, however, be part of your core portfolio. So what is a Core Portfolio, exactly? A core portfolio is a section of your portfolio dedicated to your long- and short-term financial objectives. It would be best to consider investing in equity and debt funds to achieve these objectives based on your risk tolerance.

You can invest in gold funds to diversify your portfolio's risk, but don't expect the same returns as in the previous year. In general, you should keep your gold exposure to 10-15% of your overall portfolio. When the economy is doing well, gold funds may provide marginal returns over long periods. The purpose of investing in gold funds is to protect one's portfolio from a sharp drop in the stock market. As a result, invest with this goal in mind to avoid being disappointed with the results.

Conclusion:

While gold can help you diversify your portfolio and hedge against inflation, it may not be the best option for your long-term financial objectives. First, consider how the gold fund fits into your financial plans. Those new to the investment world might feel more at ease with investment in gold mutual funds. Through transparency and professional management, a gold mutual fund may help you optimize your investment portfolio. Of course, it is a better avenue for gold investment than buying physical gold.