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Why Gold Mutual Funds Are Attractive Investments - Money Morning | How to invest in gold

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Monday, 9 June 2014

Why <b>Gold</b> Mutual Funds Are Attractive <b>Investments</b> - Money Morning | How to invest in gold

Why <b>Gold</b> Mutual Funds Are Attractive <b>Investments</b> - Money Morning

Posted: 05 Jun 2014 10:57 AM PDT

gold mutual funds

Gold mutual funds are gaining attention as a safe-haven investment to hedge against the market volatility 2014 has brought so far.

These types of investments are managed by professionals who analyze and monitor the movement of gold and invest accordingly in bullion and equities. Through a gold mutual fund, investors can target companies involved with the mining, exploration, distribution, and/or processing of the yellow metal.

Here we examine one method for how to invest in gold, using gold mutual funds - plus we've highlighted a few to get you started today.

Deciding Whether Gold Mutual Funds Are the Right Investment Tool for You

There are four notable advantages to investing in gold mutual funds.

One is that, in purchasing shares of a gold mutual fund, an investor is automatically gaining portfolio diversity, when compared to purchasing shares in a single company.

Another advantage is ease of use. Because of fund managers' oversight - which is the case for all gold mutual funds - an investor will not have to constantly track this investment. Instead, all the investor need do is select and invest in a mutual fund of choice. The rest of the research and monitoring is done by the fund managers. A single call will provide detailed information on the status of your funds, and assistance will be provided by your fund managers in buying or selling your fund units.

Yet another plus is that gold mutual funds allow investors to get involved with the yellow metal without the risks and challenges of storing tangible gold coins or bullion.

And finally, as opposed to investment tools like exchange-traded funds (ETFs), for which each transaction costs a brokerage fee, there is no such fee charged for gold mutual funds.

However, this advantage brings up the one factor of gold mutual funds that turns off investors looking for a short-term profit...

Though there are no transaction costs, investors must pay much higher management costs compared to an ETF to compensate their fund managers' work. The other notable weakness is that gold mutual funds are more complicated in terms of quickly reacting to gold prices compared to ETFs.

Because of these two factors, gold mutual funds are much better suited for the long-term gold investor and not for fast-paced, reactive day traders.

Gold Mutual Funds to Help Get You Started

Many investors choose investment funds with a long-term year-to-date appreciation term and that have a healthy outlook and a low expense ratio.

Here are five gold mutual funds to get you started right now:

Vanguard Precious Metals and Mining (MUTF: VGPMX): Assets are invested in foreign and domestic companies that are involved in precious metal exploration, mining, and distribution. The funds have an expense ratio of 0.25% and a year-to-date return of 4.16%. Morningstar rates VGPMX as a four-out-of-five-star investment.

Tocqueville Gold Fund (MUTF: TGLDX): Assets are invested in gold mining and processing in domestic and foreign companies. There is an expense ratio of 1.34% and a year-to-date return of 13.8%. Morningstar rates Tocqueville as a four-out-of-five-star investment.

American Century Gold (MUTF: BGEIX): This fund has assets in securities related to the mining and processing of gold, as well as the distribution of precious metals. Funds have an expense ratio of 0.68% and a year-to-date return of 6.4%. Morningstar rates BGEIX as a two-out-of-five-star investment.

First Eagle Gold (MUTF: SGGDX): Assets for this fund are in gold securities of mining finance companies and processing companies. The funds have an expense ratio of 1.25% and a year-to-date return of 10.06%. Morningstar rates SGGDX as a five-out-of-five-star investment.

Oppenheimer Gold & Special Minerals B (MUTF: OGMBX): Investments for this fund are in domestic and foreign gold mining and processing companies. It has the higher expense ratio of 2.09% (average expense ratios are 1.40%). The year-to-date return is 0.78%, and Morningstar has rated this gold mutual fund at two out of five stars.

Money Morning recently detailed for our Members the importance of owning gold now - and delivered a two-part "cheat sheet" that outlines the right amount of gold for your portfolio. You can get that gold investing guide - for free - here.

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New <b>Gold</b> ETF OUNZ Offers Something Different to Investors

Posted: 03 Jun 2014 12:03 PM PDT

new gold etfGold investing update: A new gold ETF, Merk Gold Trust ETV (NYSE Arca: OUNZ), was launched May 16, 2014.

It seeks to corner an often-neglected part of the investment market: goldbugs who like to hold on to tangible gold.

You see, Merk Funds, the firm behind OUNZ, hopes this new gold ETF will appeal to investors who wish for the opportunity to turn in their exchange-traded fund (ETF) shares for the delivery of actual physical gold bullion, like bars and coins.

OUNZ isn't the first ETF to offer such an option. For instance, SPDR Gold Trust (NYSE Arca: GLD), the world's largest gold-backed ETF, also has a shares-for-gold exchange option.

But Merk has found interesting ways to differentiate OUNZ from the crowd.

Here's how this new gold ETF works - and how its differences might make it precisely the investment you're looking for...

Everything You Want to Know About the New Gold ETF OUNZ

Merk Gold Trust ETV is an exchange-traded fund with shares invested in gold bullion. The shares of this fund are designed to track the price of physical gold bullion, less the expenses needed for Merk Gold Trust to run operations. But that's not the main objective, according to Merk Investments President and Chief Investment Officer Axel Merk.

"For OUNZ, tracking the price of gold is a secondary objective. Our first priority is to allow investors to invest in physical gold through an ETF with the option to take delivery. But that doesn't mean we don't take the secondary objective seriously," Merk wrote in an article he authored about his new gold ETF.

"The most important differentiating factor of OUNZ compared to other products is that investors may request delivery of their gold," Merk reiterated in a phone interview with MarketWatch.

Here's how it actually works: Merk Gold Trust has possession of gold bullion in a vault in London. Investors can purchase pro-rata shares of this gold. When it comes time to exchange the OUNZ shares, investors have the option of receiving actual gold.

OUNZ's delivered gold will be in the form of London bars. Investors may also have the gold exchanged into other currencies, such as:

  • American Gold Eagle Coins (1 oz)
  • American Gold Buffalo Coins (1 oz)
  • Australian bars (1 oz or 10 oz)
  • Australian Gold Kangaroo Coins (1 oz)
  • Canadian Gold Maple Leaf Coins (1 oz)

There is one interesting effect of this deliver option: This new gold ETF allows investors to dodge some tax consequences. You see, obtaining delivery of the gold is a non-taxable event - the investor is merely taking possession of the gold that they had purchased as shares from Merk Gold Trust. Compare this to other gold ETFs, where the sale of shares is viewed as a taxable event by the IRS. Barron's describes the taxable event as being just like that of art or coins - all are sales of a collectible and can trigger capital-gains taxes of as high as 28%.

Aside from tax treatment, another difference that sets this new gold ETF apart from other ETFs that also have gold delivery options is the amount of shares investors must own before they can exchange them. GLD, for example, requires investors to have a minimum of 100,000 shares in a lot referred to as a "basket" to be able to exchange the shares for physical gold.

"Because of the size of the baskets (100,000 shares for GLD), individual investors aren't likely to have a position big enough for a redemption," World Gold Council Managing Director Will Rhind said to MarketWatch. "The people who are creating baskets or redeeming shares are generally on the institutional level."

But Merk's new gold ETF only requires investors to have roughly 100 shares to exchange for gold, making a "deliverable gold ETF" option available to non-institutional, smaller-scale investors.

NEXT: With a new, impressive prime minister, and a burgeoning consumer population, this country is setting up an economic miracle...

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<b>Invest In Gold</b> the Smart Way - Outside View by PersonalFN

Posted: 04 Jun 2014 05:00 PM PDT

 
Invest In Gold the Smart Way

The importance of gold in one's portfolio cannot be understated, and for India gold over decades has been looked as traditional safe haven, making a currency of choice. In our country people buy, this precious metal on and for various occasions such as religious festivals, marriage etc. which pulls the demands for this yellow metal. But along with the demand, there are various factors which affect the price of gold.

Historically gold prices are determined by a combination of political and economic factors. However, in the past few years the other major factors which affect the prices of gold are as under:

  • Weak U.S. Dollar:

    As long as buying interest is seen in the U.S. Dollar, the dollar generally remains strong, which refrains gold prices from making any significant up-moves. However, once the US Dollars are dumped (sold) or buying interest in the dollar mellows, it weakens the dollar, thus turning investors' attention towards the safe haven – gold. Infact during such scenarios most countries also accumulate more gold, thereby increasing their gold reserves.

  • Economic turmoil:

    Whenever the global economy suffers the pain of an economic crisis, heads turn from "equity" to "gold", which thus makes prices of gold move up; thus indicating that investors' take refuge in this safe haven.

Also today for investing in gold, investors have various options. They can invest in the old-fashioned physical form, Gold Exchange Traded Funds (Gold ETFs) and/or also invest in equities of gold mining companies, through gold mining funds.

Our experience speaks that, very often investors get lured by escalating gold prices and invest in the yellow metal mostly by buying physical gold, without really evaluating the pros and cons offered under each mode/option of investing in gold.

Here are various options for investing in gold investing:

Physical Gold

If you are an hardcore believer of investing in physical gold, the only advantages which it can offer you is "touch, feel and see" along with the choice of converting the gold coins and bars collected by you; into jewellery at some point in time. However, this passion of investing in gold in the physical form has some disadvantages which are as under:
  • Holding cost:

    Yes, we often don't evaluate that holding gold in a physical form, comes at a "holding cost". Holding cost refers to the cost of holding a security. Hence, the locker rent which one pays for stacking gold in the bank locker constitutes to be the holding cost.

  • Quality:

    Unless the gold which you buy is from a reliable source, the quality of the same is always under question, thus resulting in your precious asset losing its true value.

  • Premium:

    Very often jewellers and banks sell gold coins and bars at a premium, to the market price. The premium is usually in the range of 5% - 10% (inclusive of making charges) in case of jewellers and upto 15% in case of banks. So, in that sense the pricing of gold varies depending on the vendor.

  • Resale Value:

    While selling your physical gold, you must have encountered some horrendous experiences of your gold merchant telling you "this is not 100% pure – it has some mixing", thus questioning the quality of the gold held by you. Moreover, if the quality of the gold held by you, is of the finest purity, then while converting gold into jewellery making charges are deducted. And as regards the banks are concerned they will refuse to buy-back your gold.

  • Tax:

    If you are gold bug, then you would also be axed by wealth tax.

Gold ETFs

For gold bugs, investing in Gold Exchange Traded Funds (GETFs) today is a very simple and a lucrative exercise.

So, what is Gold ETFs?

Before understanding GETFs, let's first understand what is meant by Exchange Traded Funds (ETFs). ETFs are instrument, offered by mutual fund houses and are listed on a stock exchange. They represent ownership in an underlying security, commodity or asset. Hence, now to simply put, a GETF is an instrument that represents an ownership of gold assets. This gold is held on your behalf by an appointed custodian for the ETF.

When you buy a GETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment. They are open-ended funds which track prices of gold, and each unit of gold in the fund that you can buy, is equal to 1 gram of gold (some fund houses also offer 1 unit at 0.5 gram of gold). However you will never get to see or receive delivery of the gold you own – you will only have a contract that represents your ownership interest.

GETFs are listed and traded on a stock exchange and hence can be bought and sold like stocks on a real-time basis. But to own them you need to open a demat account along with a share trading account with your broker. While transacting in GETFs, you would be required to simply call your broker and place your orders (at the prevailing market price), or do the same with the online trading application provided by him (broker).

So, now one may ask - what's the advantage if I can't touch, feel and see the precious yellow metal? Well, GETFs offer a host of benefits which are as under:
  • Convenience:

    GETFs are a convenient means of investing in gold because there's no question of physical delivery. Hence, you do not have to worry about the storage and security aspects that are typically associated with investing in physical gold.

  • Quality:

    You don't have to worry about the quality of the gold which you hold; because as per the Securities and Exchange Board of India (SEBI) regulations, the purity of underlying gold in GETFs should be 0.995 fineness and above.

  • Premium:

    We are sure that you must have encountered the horrendous experience of the gold vendor charging a premium at the time of your purchase of physical gold. However, this does not happen in GETFs as transactions take place at the prevailing market rates, without paying any premiums. Hence, the pricing in GETFs is transparent.

  • Low cost:

    To store physical gold, you would typically need a locker. And as you may be aware that a locker rent comes at a cost. Hence the holding cost which you incur in the form of locker rent, are completely done away with. The only cost you would have incur for holding GETFs is the cost of maintaining your demat and trading account with a broker, and the nominal brokerage for each transaction. Finally, there are annual recurring charges which are charged to the fund.

  • Resale value:

    Unlike physical gold, GETFs can be easily sold in the secondary market on a real-time basis (i.e. at the prevailing market price). Whereas, while selling physical gold, the jeweller will deduct making charges (the charge that is added while buying gold). As regards banks, they refuse to buy back gold.

  • Taxation:

    Tax implications on GETFs are same as those on debt mutual funds. A unit of a GETF that is held for less than twelve months is treated as a short-term capital asset. Gains on the same are taxed at your marginal rate of tax (i.e. as per your income slab). Units held by you for more than twelve months are treated as long-term capital assets, and would be subject to long-term capital gains tax at 20% (after allowing for indexation benefit) or 10% (without indexation benefit), whichever is less.

Moreover, you do not have to bear the burden of Wealth Tax if you invest in GETF.

Gold Savings Fund

Gold Saving funds (also known as "gold funds"), is relatively a new breed to invest in gold regularly. Gold Saving funds are generally fund of fund schemes which invests their corpus into an underlying Gold ETF which benchmark their performance against the physical prices of gold. Hence by doing so, they attempt to provide returns that closely correspond to the returns of its underlying Gold ETFs.

Even though "Gold Saving funds" are passively managed, the most wonderful thing about them is that, they provide you the opportunity to invest in gold without really having to worry much about how to store it physically, since units are allotted to you. But here, unlike Gold ETFs (where you hold units in your demat account); in gold funds you are allotted with units of the fund in a paper form (it reflects in the mutual fund account statement).

The annual expenses charged by Gold Savings funds may be comparatively higher than what is charged for Gold ETFs, as it includes the additional fund management cost along with the cost of Gold ETFs. Thus investors having a demat account, may find it cheaper to buy Gold ETFs instead of applying in this fund. However for investors not having demat account, gold funds may be cost effective investment option for investing in gold in a paper form, because here you do away with the annual charges of holding a demat account (which you incur while holding Gold ETFs). Moreover, gold funds apart from lump sum investing, offer the Systematic Investment Plan (SIP) mode, which is effective and convenient way of investing regularly in gold.

World Gold Mining Funds

Investors also live under impression that by investing in gold mining funds, they'll be able to bet on the movement of gold prices. Well that's not the case!

Gold mining funds are feeder funds that invest in offshore funds investing in stocks of gold mining companies. The investments in gold mining fund is linked to both gold price movements and volatility in equity markets, as these funds bet on stocks of gold mining companies.

These funds are highly correlated to equity markets and relatively less correlated to gold price movements. So, when equity markets perform well they too perform well. Hence, these funds are suitable only for those investors' who have a high risk appetite.

Our View:

We believe that Gold ETFs and Gold Saving funds are a smart way for investing in gold, for the advantages they offer. However, if one wants to take advantage of both equity as well as gold and, has high risk appetite then gold mining funds can be considered. But, please don't be under the illusion that by investing in gold mining companies' fund, you are betting on the gold price movement completely.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 
 
 
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