What Happens When You Invest in a Gold Fund: The Journey from Your Bank Account to Gold Bar in a Vault
Gold has long been considered an investment that one should keep in their portfolio. But holding physical gold comes with challenges like storage and security. That's where gold funds step in, offering a modern way to invest in gold. But what happens behind the scenes when you invest in gold funds? Let’s break it down in simple steps, explaining how your money transforms into a bar of gold stored securely in a vault.
Step 1: Your Investment Begins
When you invest in a Gold Fund, the first step is transferring your money from your bank account to the mutual funds’s bank account. This is where your investment journey starts.
Step 2: Purchasing Physical Gold
The Fund Manager then uses your money to purchase 1Kg gold bars that meet strict purity standards (99.5% purity and above). These gold bars are sourced from accredited suppliers, ensuring quality.
Step 3: Storing Gold in a Secure Vault
After purchasing the gold, it is transported to a secure vault. For a Gold Fund, these vaults are managed by some of the world’s most trusted vault providers. This is where your gold is stored under high security, and, in addition, it is fully insured, ensuring that your investment remains protected against any unforeseen circumstances.
Step 4: Allotment of Units
The units are allocated to the investor at the applicable NAV by the AMC. These units represent your proportional ownership of the physical gold held in the vault. It’s a way to own gold, without the hassle of physically storing or managing it.
Step 5: Redeeming Your Investment Units
When you decide to redeem your investment units from the Gold Fund, the process is just as simple. Upon placing a redemption request, the fund manager sells the corresponding amount of physical gold. Your units are processed at the applicable Net Asset Value (NAV), and the proceeds are credited to your bank account. This way, you can liquidate your investment quickly as compared to the hassle associated with selling physical gold.
Key Takeaway
Investing in a gold fund combines the security of physical gold with the ease of digital ownership. While the above overview covers the basics, the actual process involves a more complex workflow. Authorized Participants, like bullion traders, play a role, and the fund manager’s buying and selling of physical gold depend on factors such as liquidity within the scheme. The process can also vary between a Gold ETF and a Gold ETF Fund of Fund (FoF). However, the key point is that your investment is backed by actual gold securely stored in a vault, making it a safe, convenient, and hassle-free option. With a Gold Fund, you benefit from the stability of owning real gold alongside the flexibility of digital access, giving you the best of both worlds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Gold Fund shall refer to Gold ETFs and Gold ETF Fund of Fund (FoF) only. It may be noted that the actual process of how Gold ETFs/Fund of Funds operate may vary significantly from fund house to fund house.
Published on Nov 18th 2024
