Gold has risen by more than 400 percent in the last 10 years and the forecast is that it will continue to rise. Domestic demand from China and India is strong and fears of higher inflation due to more quantitative easing are among the factors drawing investors to the gold market. Becuase of these factors, investing in gold is on the minds of many. Those that pursue the investment quickly learn that there are many ways to invest in gold, each with its own advantages and disadvantaves. One of those ways is through gold mutual funds.
When investing in gold, the high level options are buying physical gold, buying shares in individual gold mining companies or investing in gold mutual funds. Most gold funds invest primarily in companies that are directly involved with mining, distributing or processing precious metals. They can also invest in gold securities, buy actual bullion or buy stock in companies that are indirectly affiliated in some way with gold or precious metals, such as a company that makes mining equipment.
There are some benefits and some drawbacks to this style of gold investment. As is usually the case when investing in gold, some of the advantages of investing in gold mutual funds are also disadvantages. The key factor in deciding whether these investments are right for you starts with goal setting. Here are some things to consider when determining if gold mutual funds are a good fit for your investment goals.
As with other mutual funds, gold mutual funds are directed by a fund manager. They are a good way for a new or inexperienced investor to get into the market because it puts the work of researching companies into the hands of professionals. Mutual funds are convenient for the investor because the investor does not have to make the decision when to buy, sell or hold; those decisions are made by the money manager. This convenience comes with a higher degree of risk. If the fund manager makes a bad decision, the entire investment could be in jeopardy.
Diversification and risk
Gold mutual funds are attractive compared to buying shares in individual mining companies. Because most funds hold equities in several gold mining companies, there is a certain amount of protection in that if one company has problems the other companies may still perform well. However, the success of the investment is dependent on the company’s management capabilities rather than the price of gold.
Mutual funds that heavily invest in mining companies can return a lucrative profit but also carry a large amount of risk because they are subject to uncontrollable events. Political instability or labor unrest in the country where the mine is located, and natural disasters such as an earthquake or flooding are unforeseen events that can adversely affect your investment.
There is also a certain amount of volatility when investing in mutual funds. Some funds allow hedging, shorting and option writing. These activities can be profitable, but carry a high degree of risk.
Many mutual funds charge a load fee, or sales charge. This fee is usually a percentage either of the amount being invested or the value of the stock being sold. It can be as high as 5 percent.
Another fee assessed by mutual funds is a management fee, which typically runs around 1.5 percent of the amount invested in the fund. This fee is assessed each year and goes toward paying the salary of the fund manager and covering expenses incurred by the fund.
When researching which gold mutual fund to invest in, investors need to pay attention to the fund’s portfolio turnover. This measures how often shares are bought and sold within a fund. The higher the percentage, the more transaction fees will be incurred by the fund. These transaction fees are passed on to the investor and reduce the return on investment. In addition, look at the fund’s expense ratio, which measures the operating costs of a fund. A high expense ratio will also reduce the investor’s return.
Also be aware that some funds may charge a penalty to cash out before a certain length of time has elapsed.
Many gold mutual funds require a minimum investment to join the fund. This minimum can range from $1,000 to $10,000. For minimums on the lower end, it is just as easy to buy coins or bullion and take actual possession of the gold. With a minimum on the higher end, an investor could begin investing in physical gold much quicker than it would take to save $10,000.
Another drawback to mutual funds is that some funds are closed to new and current investors when a specific amount in assets is reached.
Tax implications of gold mutual funds and retirement
When shares in a mutual fund are sold for a profit, the investor is assessed a capital gains tax. If the fund has a high turnover ratio, it could mean more distributions that are taxable.
The Internal Revenue Code allows IRAs to own specific gold coins, such as American Gold Eagles and Canadian Gold Maple Leafs, if they meet guidelines as to purity. It is difficult, however, to find a trustee willing to set up the IRA, work with a dealer on the transfer of money and coins and arrange for the storage of the coins or bullion.
Although they are allowable by the IRS, some IRAs do not accept physical bullion as an investment method. In this case, investing in gold mutual funds might be an advantage.
Historical performance of gold mutual funds
Investing in gold through a mutual fund might seem to provide peace of mind if you choose a company that has been in existence for a number of years. However, that is not a guarantee of stability. Sixteen gold funds have terminated since 1989; nine have changed management. One gold fund was opened in 2002 and one closed in 2001. In today’s market, the past performance of a mutual fund is not an assurance of future performance. Electronic traded funds An electronic traded fund is an open-ended mutual fund. A gold ETF is often referred to as “paper gold” because the investor does not actually own the gold. Rather, the investor owns a piece of paper that acts as a substitute for gold.
Gold ETFs are risky because there is no guarantee the ETF is actually buying and storing the gold in a physical location. The gold is not required to be audited and an investor might find it is not there when it is time to redeem the paper for the gold. Even if gold is actually being bought and stored, an ETF is risky because there is no way to guarantee the amount of physical gold equals the number of shares outstanding.
Although the ETF is passively managed, it still incurs some management fees, and the return on investment is reduced by expenses for fund management.
ETFs trade throughout the day, which adds increased volatility. ETFs can experience price surges and dips as they react to constantly changing news.
When it comes to investing in gold, nothing beats having the physical gold in your possession. Physical possession eliminates the risks and fees associated with gold mutual funds, assures you financial privacy and ensures your asset is available when you need it.