How Precious Metals Mutual Funds Work

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?

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.

Out of all of the precious metals mutual funds, gold funds are, by far, the most popular. Here are some reasons why:

Gold itself is becoming increasingly popular, and supply can't keep up with demand. Exploration and development in the gold-mining industry dropped 70 percent between 1980 and 2000. Since then, greater wealth around the world has created more gold buyers, especially in India and China, which have long been gold-loving countries [source: Middleton]. Couple those factors with the fact that gold's demand and price rise in tandem, and you'll see why gold is a very popular investment.

What also makes gold a popular investment is that it often becomes expensive when other investments are dropping. Gold's high performance as other stocks and bonds tank make it look even more appealing to investors worried about their portfolios.

Silver is also a popular precious metals mutual fund, although not nearly as popular as gold. Many mutual funds have both gold and silver as part of their stocks. Platinum can also be invested in through a precious metals mutual fund, but it's more complicated. There are no platinum funds on the New York Stock Exchange so the investments must be made in a foreign market.

For all of the benefits of gold and silver mutual funds, there are still risks and potential downsides. Some funds can be more volatile than others. Because mutual funds are handled through fund managers, transaction fees and other expenses can differ greatly. What's more, funds may charge fees or penalties for cashing out before a certain period, which can hurt your investments if the precious metals market shifts before you can pull out.

There are risks and rewards with all investments, but the current market and economy might make gold or silver mutual funds a good addition to your portfolio. To learn more about investing, visit the links below.