What is a Gold Mutual Fund and How to Choose One

Gold, a classic asset for investors, has garnered significant attention during periods of soaring inflation. Renowned for its long-standing reputation as a safe-haven asset, gold is widely used as a store of value. Among the most popular methods for investing in gold are purchasing physical gold bars and investing in gold mutual funds. While the former is straightforward and familiar, investing in gold mutual funds requires additional consideration from investors.

For those interested in and curious about gold mutual funds - what they are, how to choose them, and what types are available - we have compiled some fascinating information for you.

Understanding Gold Mutual Funds: An Introduction

A mutual fund pools capital from individual investors, allowing asset management companies to invest according to various fund policies, such as investing in indices, large-cap stocks, oil, or gold. Therefore, a gold mutual fund is a collective investment scheme that takes money from retail investors to invest in gold assets as per the fund's predetermined policy.

Gold mutual funds are passive funds, meaning their returns mirror global gold prices. Consequently, they must establish a reference asset price. Most gold mutual funds use the SPDR Gold Trust price standard, which is the largest ETF with a policy of investing in gold bullion. Some funds also invest directly in gold bars. As a result, gold fund prices typically fluctuate in line with global gold prices.

How to Choose a Gold Mutual Fund

While most funds in the market have similar policies focusing primarily on gold investments, they often differ in the details of their investment strategies. These may include currency risk hedging policies, dividend policies, and trading venues. Some of these factors directly impact the fund's returns, which investors should consider before making a purchase.

◆ Currency Risk Hedging Policy ◆

Some gold mutual funds in the market may not perfectly track global gold prices due to differences in currency risk hedging policies.

Gold trading in the global market is based on the US dollar. When converting back to the fund's value in local currency, it's necessary to adjust the value according to the exchange rate. For example, if the local currency weakens, the value of the gold mutual fund adjusted to the local currency will increase. Conversely, if the local currency strengthens, the value of the gold mutual fund in local currency will decrease. This exchange rate risk is a key factor affecting investor profits beyond price volatility. Therefore, the hedging policy is one factor investors must consider before choosing a fund.

If investors can accept higher risk, choosing an unhedged gold mutual fund could be a good option to potentially enhance investment returns. This is particularly true when gold prices are rising and the local currency is weakening, which can lead to better-than-usual fund performance. Conversely, if gold prices are declining while the local currency is strengthening, investors in these funds may incur greater losses than usual.

To mitigate currency volatility risk, some risk-averse investors prefer gold mutual funds with currency hedging. This ensures that returns truly track global gold prices.

◆ Dividend Policy ◆

If you notice that some gold mutual funds have lower returns than others despite having similar currency risk hedging policies, it may be due to the fund's dividend policy. These funds gradually distribute cash flows from the fund's profits, which naturally reduces long-term returns but provides investors with current cash flow.

◆ Trading Venue ◆

Another question that may arise is whether gold mutual funds that choose to invest in different stock exchanges (e.g., New York vs. Singapore) will yield different performance results.

Data shows that there is no significant difference. The main distinction between investing in these two markets lies in liquidity, with the New York Stock Exchange generally offering higher liquidity than the Singapore Exchange. However, due to the time difference between the New York Stock Exchange and local markets, price announcements may be delayed compared to those from the Singapore Exchange. This means investors in funds trading on the New York stock market may receive price information one day later (T+1).

Examples of Noteworthy Gold Mutual Funds

★ GOLD-AAAAA ★

This is a gold mutual fund from Gate's fund family that is managed as a passive fund, investing in units of gold ETFs traded on major global exchanges. The fund aims to generate returns that closely track gold price movements, providing investors with an opportunity to gain exposure to gold price fluctuations without the need to physically own gold.