Common mistakes to avoid before investing in gold funds

Investing in gold has never been easy ever since the introduction of gold mutual funds. A retail investor who wishes to invest in gold as an asset can do so without having to buy the commodity. With gold funds, investors can now own gold in digital form without having to own it in physical form. To find out more about gold funds, continue reading. 

What are gold funds?

A gold fund is an open-ended mutual fund scheme whose fund manager buys units of a gold exchange traded fund (ETF). ETFs are open-ended schemes that are listed at the stock exchange and investors can trade with their units at their current market price during live trading hours. ETFs aim to generate capital appreciation by replicating the performance of their underlying securities with minimum tracking error.

Gold funds try to generate capital appreciation by investing in gold as a commodity. Gold funds have become quite popular among investors who were traditionally investing in gold but have now found a new way to get exposure to this asset class without actually purchasing it physically. Gold funds are professionally managed which gives investors the privilege of active risk management.

Common mistakes to avoid while investing in gold funds 

Investing in gold funds may seem like a new and exciting way, however, there are a few common mistakes that first-time investors make before investing. Here are some of these mistakes which investors can avoid while investing in gold funds:

 Not  enough diversification

Although gold funds have the potential to help investors in accumulating wealth over the long term, some investors only invest in gold funds expecting that they will deliver returns throughout the year. When investing in mutual funds, the first rule is to diversify your investment portfolio. So investing in gold funds is a good idea, but investors must also consider investing in other asset classes like equity and debt so that the overall investment risk can be mitigated.

Investing without any specific financial goals

If you are investing in gold funds just because they are available for investment, this might not be the proper way of investing. Investors with a clear set of financial goals can adequately identify which investment avenues will help them achieve these goals. Do not let people who surround you decide where to invest, invest according to your financial goals. This will help you stay away from wrong investment decisions and avert any monetary losses.

Ignoring expense ratio

Every fund has certain management costs which it recovers from investors by levying an expense ratio. An expense ratio is a fee that is deducted from an investor’s capital gains. Over the long term, a scheme with a high expense ratio can take a large chunk of your long-term wealth. Choose a gold fund that has a feasible expense ratio.

Investing without understanding the risk profile

The most common mistake which investors make before investing is that they ignore the risk appetite which the scheme carries. Mutual funds, be it gold funds or any other scheme, aren’t risk-free nor do they guarantee any returns. Investors usually end up investing in a scheme by just looking at its past performance. Risk averse investors can find it difficult to maintain a gold fund portfolio whose returns will fluctuate from time to time.

Making a lumpsum investment instead of SIP 

Lumpsum investing will only expose your entire investment sum to volatile markets. A Systematic Investment Plan on the other hand only invests a portion of your overall investment sum in the scheme.

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