A mine worker cleans a newly poured gold bar at Driefontein Gold Mine near Carltonville, South Africa. Owning an actual gold bar is not always the best investment route. Read on to find out why.

Tom Stoddart/Hulton Archive/Getty Images

Why Invest in Precious Metals Mutual Funds?

You wear a gold watch, and you have a silver picture frame on your desk. You have silver coins in your wallet, and you've even given a gold necklace as a gift. You're quite the consumer of precious metals -- and you're not alone. Because consumption of precious metals is so high, demand exceeds supply and the price goes up. If you're investing in a precious metals mutual fund, your investments go up as well, making a precious metals mutual fund a good decision.

If you have the jewelry or coins, it seems like you're already investing in precious metals. Why bother with the work of a mutual fund?

  • First of all, your jewelry or coins are often not completely pure.
  • Unless you plan to sell that special ring someone gave you, you can't make any money off of it.
  • Bullion or bars of gold can be a sound, conservative investment, but can be very difficult and costly to store. Are you prepared to turn your living room into Ft. Knox?

While mutual funds may take some research and work, they're one of the least risky ways to invest and can yield great returns.

­

Although it takes some legwork to research and pick a mutual fund, mutual funds do a great deal of the work for you. Precious metals mutual funds can manage a variety of precious metals. They can also contain stocks in mining companies. Diversification is key with an unstable market, and the mutual funds do that. Someone else -- the mutual fund manager, whose pay should be tied to the performance of the fund -- has taken the time to pick a balanced variety of stocks and bonds that work well together. If one stock plummets, several others should perform well and keep the fund's earnings stable.

While mutual funds may not give as high returns as that new hot stock, your money is much safer in the long run. Many precious metals mutual funds have stocks for multiple precious metals, further diversifying a portfolio.

As with any investment, however, a high return is not guaranteed. In fact, you could lose all of your money. Historically, precious metals have rather large price swings. They enter a long boom cycle, but then go bust -- and stay bust -- for a long cycle before rebounding [source: Anderson]. Currently, precious metals are in a boom market with high consumption. Because mutual funds help distribute the risk more evenly, disastrous monetary losses are less likely. However, because precious metal prices are so volatile, most experts recommend putting only between two and 10 percent of your total portfolio into precious metals mutual funds.

Gold and silver aren't just for the blissfully married. They're also the most popular mutual funds. Continue reading to discover why.