Many precious-metal mutual funds hold gold bullion. Some hold nothing but gold bullion; others maintain a mix of gold-related assets, such as futures contracts and mining stock. Some diversify into other precious metals such as platinum and palladium. In all cases, investors must evaluate the quality and safety of the mutual fund’s portfolio, the possibility for income, and the fees. Though most mutual fund are open-end, closed-end funds offer additional features.
Open-End Mutual Fund
Open-end mutual funds are administered by fund management companies under the direction of investment managers. You buy and sell shares through the mutual fund company, which creates or cancels shares as required. The published net asset value is the price of one share of the fund after trading has closed for the day. Intraday trading is not available with open-end funds. Taxes on gains and dividends are passed through to investors in all mutual funds, including gold funds.
Open-End Gold Bullion Funds
You can choose from open-end gold mutual funds that hold varying ratios of gold bullion, from zero to 100 percent. The problem with an open-end bullion-only fund is that is has no mechanism for generating income. It can generate capital gains by selling some gold at a profit, but then your gold bullion fund becomes a bullion and cash fund. If the cash is distributed as a dividend, then the overall size of the mutual fund shrinks. Over time, the fund might dwindle away. Bullion-only funds have high overhead costs for storage and insurance, which they pass along as fees to investors.
Mixed-Asset Gold Mutual Funds
These funds might have no bullion at all. Many gold mutual funds rely on futures trading and ownership of gold mine stock to generate income. These funds have the possibility of generating income. However, conservative investors who insist on nothing but bullion avoid mixed-asset funds. Some funds with the word “gold” in their names also hold assets based on other precious metals. This information must be disclosed in the mutual fund’s prospectus, which you should always read before investing.
Closed-End Gold Funds
A closed-end mutual fund starts with a privately owned portfolio that undergoes an initial public offering. The fund shares then trade just like stock on an exchange, with dividends and capital gains paid at least once a year. You generate capital gains and losses on shares you sell. Closed-end gold funds can increase risk and return by borrowing money to buy additional gold-related assets. If you want consistent dividend income, try a closed-end fund that sells covered call options on its bullion. Covered call selling is a safe way to generate income, but it's not available to open-ended funds.
Video of the Day
- The Trader's Great Gold Rush: Must-Have Methods for Trading and Investing in the Gold Market; James DiGeorgia
- Stack Silver Get Gold - How to Buy Gold and Silver Bullion without Getting Ripped Off!; Hunter Riley III
- Precious Metals Investing For Dummies; Paul J. Mladjenovic
- Photodisc/Photodisc/Getty Images