Gold funds and gilt funds, and what hedging actually means
Hedging sounds like something only institutions worry about. The idea of it is far more useful than that.
Hedging has an intimidating reputation and a simple idea underneath it. If everything you own moves together, a bad year means all of it suffers at once. If some of what you own moves differently, the fall is softened. That is the whole concept.
What a gold fund is
A gold fund is a mutual fund that invests in gold, usually by holding units of a gold exchange-traded fund. It tracks the price of gold rather than picking gold stocks in the fund.
The practical appeal is that you can buy it like any other mutual fund, including through a monthly SIP, without needing a demat account and without storing anything.
Why gold cushions an equity fall
Gold is often described as an inflation hedge, and it has historically tended to hold value when currencies weaken. It also tends to move inversely to equity markets, or when shares fall sharply, gold frequently does not.
You are not buying gold because you expect it to outperform. You are buying it because if it suddenly is, it is often because something else you own is not.
What a gilt fund is
A gilt fund invests only in bonds issued by the central and state governments. Because the borrower is the government, credit risk is effectively negligible. You are very likely to get your money back.
What you are exposed to instead is interest-rate risk. Bond prices move opposite to interest rates: when rates fall, existing bonds paying higher rates become more valuable and gilt funds do well. When rates rise, the reverse happens.
How the two differ
| GOLD FUND | GILT FUND | |
|---|---|---|
| Invests in | Gold, usually via a gold ETF | Central and state government bonds |
| Main risk | Gold price movement | Interest rate movement |
| Credit risk | None in the usual sense | Effectively negligible |
| Behaves well when | Equity falls, or currency weakens | Interest rates are falling |
| Role | Long-holding periods | Investors who can watch the rate cycle |
Worth knowing
Neither is a substitute for an emergency fund, and neither guarantees a return. A gilt fund is low on credit risk, which is not the same as low risk from all sources.
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