Gold Sector Fund
Also written Gold sector funds · Gold mining fund · Gold equity fund · Gold companies fund
A scheme holding the shares of gold mining and gold processing companies, so its returns follow those companies' profits rather than the price of gold, unlike a Gold ETF.
In plain language
Two schemes have gold in the name. They do not hold the same thing.
A Gold ETF holds gold. Its NAV closely tracks the metal, because it reflects the value of the gold held in custody for the units issued.
A Gold Sector Fund holds shares. The shares belong to companies that mine gold or process it. What the scheme earns depends on how well those companies do.
Much of the time the two move together. Sometimes they do not.
When the gold price rises, a miner sitting on large reserves can gain far more than the metal did. When the price falls, the same share can fall further.
And a share brings its own troubles. If the market worries about a company's management, its price can drop while gold is going up. Gold itself has no management.
So the workbook's advice is blunt. Before buying a gold fund, find out which of the two it is.
How it works
Chapter 12 states the distinction and then explains it. Gold Sector Funds are schemes that invest in shares of gold mining and other gold processing companies, and the performance of these funds is linked to the profitability of these gold companies — unlike a Gold ETF, whose performance tracks the price of gold. When the gold metal price increases, gold mining companies with large reserves of gold can appreciate a lot more than the gold metal, and conversely they can fall more when the metal falls. Their share prices are also driven by factors other than gold: if there are concerns about a company's management, the share price may decline irrespective of the price of gold. An ETF's NAV, by contrast, closely tracks the metal, which the workbook calls a more efficient way to take exposure to gold.
Chapter 10 section 10.6.3 turns that into an instruction: an investor in a gold fund needs to be sure what kind of gold fund it is — Gold Sector Fund or Gold ETF. Either way, if the value or price of gold falls, the investor can end up making a loss.
What drives gold returns at all (Chapter 10 section 10.3.3): gold as an asset class does not generate any current income, so the only way to make money is to sell above cost. Returns then depend on the global price of gold — a safe haven that rises in political or economic turmoil, weakens when central banks or the IMF sell reserves, and strengthens when large countries buy — and on the strength of the rupee, because a stronger rupee converts the same foreign-currency gold price into fewer rupees and pushes gold fund returns down.
Where it belongs in a portfolio (Chapter 12): exposure to gold funds can be increased when inflation is high or when there are political, economic and fiscal uncertainties. Those are tactical holdings, kept for as long as the conditions last. A moderate investor may be comfortable with an 80 per cent core and a 20 per cent satellite or tactical allocation.
On figures, the workbook gives none for a gold sector fund itself — no minimum holding in gold-company shares, no cap, no benchmark. What Chapter 2 does give is the rule for the sectoral category it is a named member of: a minimum of 80 per cent of total assets in the equity of the particular sector or theme, and no more than 50 per cent portfolio overlap with other sectoral or thematic schemes and other equity categories except large cap. Chapter 11 names the gold price as the benchmark for a Gold ETF, and names none for a gold sector fund.
Two chapters, two emphases, and a candidate should know both. Chapter 10 section 10.3.3 says gold funds are passive in nature, so the fund manager does not take a view on gold prices and there is no risk arising from fund management decisions. Chapter 12 describes a gold sector fund as holding shares whose prices are driven by factors other than the price of gold. The workbook says both; answer from the chapter the question is set on.
A worked example
Mr Anand Kulkarni puts Rs 1,00,000 into a Gold ETF and Rs 1,00,000 into a gold sector fund on 1 April. The percentages below are illustrative; the direction of each effect is the workbook's.
Year 1 — the rupee gold price rises 12 per cent. The ETF, tracking the metal, is worth about Rs 1,12,000. The miners it is not holding are doing better than that: sitting on large reserves, their profits rise faster than the metal, and the sector fund gains 19 per cent to Rs 1,19,000.
Year 2 — the gold price falls 10 per cent. The ETF slips to about Rs 1,00,800. The mining shares fall harder, 17 per cent, to Rs 98,770.
| After two years | Gold ETF | Gold sector fund |
|---|---|---|
| Value (Rs) | 1,00,800 | 98,770 |
| Net change | +0.8% | −1.2% |
The metal is up slightly over the two years. The shares are down. Same theme, two different results.
Now add the risk that only the sector fund carries. A governance scare at the fund's largest holding knocks that share down in a quarter when the gold price does not move at all. Mr Kulkarni's sector fund falls; his ETF does not. Gold has no board of directors to worry about.
And the currency cuts across both. If the rupee strengthens, the same dollar gold price converts into fewer rupees, and the rupee returns of both holdings come down.
Why NISM asks about it
Chapter 12 (Mutual Fund Scheme Selection), in the Gold Funds passage, with Chapter 10 sections 10.3.3 and 10.6.3 behind it. The Gold Sector Fund versus Gold ETF distinction is a standard recall question — which one holds the metal, which one holds shares, and which one tracks the gold price more closely. Expect also a question on what drives gold fund returns (the global gold price and the strength of the rupee) and on when gold exposure is raised in a portfolio.
Common exam traps
- A Gold Sector Fund holds shares; a Gold ETF holds gold. Reversing the two is the classic wrong answer.
- A gold sector fund can beat the metal and it can lag it. Miners with large reserves appreciate more when gold rises and fall more when it drops.
- Company news moves a gold sector fund. Concerns about a company's management can push its share price down whatever gold is doing.
- The ETF is the more efficient route to gold exposure, in the workbook's own words, because its NAV reflects the metal held in custody.
- Gold generates no current income. The only return is selling above cost, so a question about income from gold funds has no yield in it.
- A stronger rupee lowers rupee returns from gold, even if the international price has not moved.
- Chapter 10 calls gold funds passive; Chapter 12 describes gold sector fund shares as driven by non-gold factors. Both are in the book — take the chapter the question is set on.
- The 80 per cent minimum and 50 per cent overlap cap belong to the sector fund category, which is the family. This page is a named member of it, and the workbook attaches no figure of its own to a gold sector fund.
Where this is taught
Free preparation for NISM Series V-ARelated terms
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.
- Exchange Traded FundA mutual fund scheme whose units are listed and traded on a stock exchange like a share, so you transact at live prices through the day instead of at one end-of-day NAV.
- Gold ETFAn exchange-traded fund tracking domestic gold prices, backed unit-for-unit by physical gold of 99.5% purity or gold receipts, traded on the stock exchange like a share rather than held as jewellery.
- Thematic fundAn open-ended equity scheme investing at least 80% in line with a theme — infrastructure, MNCs, PSUs — spanning several sectors, and so riskier than a diversified or focused fund but less concentrated than a sector fund.
- Sector fundAn open-ended equity scheme investing at least 80% in one sector, such as banking or pharma. The riskiest step on the diversification ladder; best used tactically as a satellite holding.
- Core and satelliteA portfolio built from a large, low-cost, usually passive core — about 70% to 80% — plus smaller satellite portions managed actively to capture shorter-term opportunities.