Mutual funds pool the money of different investors to purchase a collection of bonds and stocks and allow these to be managed by a professional. Each mutual fund investor owns shares representative of a portion of the fund’s holdings. These funds each have different methods of investing and various portfolio management styles. They can hold stocks in almost anything and one popular type of mutual fund has holdings in the gold industry.
Gold mutual funds have capital appreciation as their goal. They invest in equity securities offered by companies that mine, distribute, or process gold. They are sometimes called gold mining mutual funds because they hold gold stocks in mining and other related companies, not gold bullion itself. The price of gold mutual funds tends to swing further up and down, and do so faster, than the price of gold.
Similar to gold stocks, gold mutual funds are a leveraged play on actual gold. A modest increase in gold prices can substantially increase the amount of profit for a gold mining company, due to the fact that the company has fixed costs. However, the opposite is also the case if the price of gold decreases and this is what makes gold mutual funds more volatile than owning gold in its true form.
Operational issues in companies represented by these funds can also cause the fund price to decline. In addition, a drop in the stock market will cause gold mutual fund prices to decrease. However, if an investor believes that gold prices will rise for a long period, as is the current expectation, a gold mutual fund may be the investment of choice. The best funds will balance their leverage with the amount of risk involved.
Investors make money from gold mutual funds through stock dividends and bond interest. They also receive money from capital gains when the fund manager sells the securities at an increased price. Investors control another way to make money by selling their shares at a profit if the holdings of the fund increase in price.