What Are Gold Mutual Funds?

What Are Gold Mutual Funds?

Most mutual fund rating services define gold mutual funds as those having a objective  relating to gold set out in the  offering prospectus. Typically included are mutual funds  that pursue capital appreciation by investing primarily in equity securities of companies   engaged in the mining, distribution, or processing of gold and other precious metals.  Mutual funds labelled as "gold mutual funds" are viewed as "specialty funds" because  of their portfolio's focus on gold mining stocks, though some do own small amounts of gold  bullion.

Most gold mutual fund portfolios concentrate on gold mining stocks, but some have   significant exposure to silver, platinum, and base metal mining stocks as well. Precious  metals companies are typically based in North America, Australia, or South Africa. Some  mutual funds, included in Morningstar's group of gold mutual funds, pursue gold investing by having at least 65% of its total assets in

(i) securities of companies primarily involved, directly or indirectly, in the business of  mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum  or other natural resources ("Natural Resources Companies") and

(ii) gold, silver and platinum bullion.

Up to 35% of a gold mutual fund's assets may be invested in securities of companies that derive  a portion of their gross revenues, directly or indirectly, from the business of mining, processing,  fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources,  in securities of selected growth companies and fixed income securities of any issuers, including  U.S. government securities.

Some gold mutual funds may invest in domestic or foreign companies that have small, medium  or large capitalizations and concentrate their investments by investing at least 25% of its  total assets in Natural Resources Companies. Gold mutual funds often concentrate investments  in smaller companies and foreign securities, with mining and exploration risks of precious metals.  So, gold mutual funds are riskier and more speculative than general, diversified funds.

Why Invest in Mutual Funds that Invest in Gold, Rather than Bullion?

Mutual funds can be bought, sold, or exchanged on any day the stock markets are open   for business. Shares of gold mutual funds can be held directly with the fund company or in  your brokerage account. Unlike with bullion, there is no need for storage, and if bought  without a load, no brokerage expense or charges on sales. Mutual funds usual will redeem  your shares on request without liquidity problems associated with bullion.

Gold mutual funds normally:

Have professional management and a range of equity and/or bullion investments within the  precious metals area.

Often have performance which is uncorrelated to the broad stock market indexes.

May or may not have any correlation with the general market.

Have price moves that usually correlate positively with gold bullion prices, and typically  with leverage due to company operating leverage.

How to Choose a Gold Mutual Fund?

When selecting any mutual fund, an investor might wish to consider some or all of the  following. Other factors might affect to what extent the mutual fund selection is consistent  with the financial objectives of the investor.

1. Investment style - Large or small capitalization stocks? Foreign or domestic? Do they  allow hedging, shorting and option writing? Can they hold bullion?

2. Sales charge - None? Front-end, Back-end. 12b-1 Plan? Note that some gold mutual funds  are closed to new investors.

3. Expense ratio - This reduces the mutual fund's overall return. Is leverage expense included?

4. Portfolio turnover - Look in the financial highlights table. Higher turnover can mean more  taxable distributions (not a factor for an IRA investor).

5. Track record of past performance - This is not a guarantee of future performance.

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