FOR the cautious investor, gold has long been considered a refuge, a place to get away from the uncertainties of the stock market, worrisome political developments, or renewed inflation. While some people put a hefty share of their money in gold, a more common practice is to put 5 to 20 percent in precious metals, including gold-oriented mutual funds.
``Gold improves the quality of the portfolio,'' says John Van Eck, chairman and president of Van Eck Securities in New York. His gold fund, International Investors Inc., has had a 26 percent annual compound growth rate over the last 10 years.
Gold and other precious metals, which move conversely to paper assets and protect a portfolio from inflation, may be attractive in the coin form. But for many investors, owning gold in a mutual fund is more practical.
With a mutual fund, you can switch to another fund anytime or take your cash. Investors don't have to look for buyers when they want to sell, and they do not have to worry about storing or assaying gold. Also, people buying gold coins usually pay a premium above the market price.
The main reason to own a gold fund, however, is that ``the leverage effect is huge,'' says Clark Aylsworth, president of United Services Advisors Inc., in San Antonio, which has two gold funds. When the price of gold increases, prices of gold fund shares increase more rapidly.
Because mining costs are basically fixed, profits can fluctuate as the price of gold moves. If the price of gold increases from, say, $400 an ounce to $500, production costs may stay at about $300 an ounce, boosting profits.
Gold funds can also provide income. A gold coin's value might go up, but if gold's price remains the same, the coin's value does not change, explains John Lutley, managing director of the Gold Institute in Washington, D.C.
``With gold mining stocks, even if the price of gold stays the same, you get a dividend,'' Mr. Lutley says. ``If the price of gold increases and you own a stock, the price of the mining stock increases and the dividend goes up.''
As a result, most of the funds seem to favor stocks over metals. The Metals Economic Group Inc. in Boulder, Colo., surveyed 20 North American gold funds and found that nine had 30 percent or more of their capital in precious-metal bullion. ``The others had the majority of their capital in stocks, because they give better play,'' says Jim Lowery, a researcher for the group.
Diversity is another reason to own gold through a mutual fund. A fund balances a portfolio and allows an investor exposure to many stocks. ``The large number of stocks lowers the risk against a single stock, but will dilute the performance of superior stock,'' says Michael Chender, president of the Metals Economics Group.
This diversity also protects against the risks of mining: Mines may have a fire or flood or turn up dry, or miners may strike. ``Many mines are nothing more than holes in the ground,'' says Michael Kosich, vice-president of marketing at Benham Capital Management Group in Palo Alto, Calif.
Also, mining is far removed from what investors are used to looking at.
``There's no real feeling for gold mining, or any mining, for that matter,'' says John Brimelow, director of international research at Keane Securities in New York. ``It makes sense to delegate investing in gold to professional management, because an investor probably lacks the time or skills to follow the market daily.''
As a rule, gold fund managers look at the mining companies and vary the mix among the countries, says Reg Green, editor of Mutual Fund News Service in San Francisco. They also look at a company's performance independent of gold's price, such as length of time in business and the experience of its management.
Interest in gold mining stocks and gold funds has grown despite a relatively low inflation rate and a more stable economy, two factors that traditionally work against investment in metals.
The Investment Company Institute, the mutual fund trade group, lists 19 gold-oriented mutual funds, some of which invest only in North America and Australia, while others invest around the world. Sales of gold funds tracked by the ICI grew from $54 billion in September 1985 to $114 billion in September 1986.
United Services Advisors has two gold funds. Assets in the United Services Gold Fund, which started in 1974, have grown 25.9 percent over the last 12 months. The fund invests in South African mines, and it has assets of $293 million.
Assets in the New Prospector Fund, which started in November 1985, jumped from $10.8 million in January to almost $50 million in November. It invests in mines in Australia and North America.
Fidelity Investments in Boston offers two gold funds: Select Precious Metals and Minerals, and Select American Gold. Select Precious is an international fund investing in gold, silver, and other metals, according to Neal Litvack, marketing manager of Fidelity's Select Portfolio.
The Select American Gold was started in December 1985 because of the ``tremendous demand for gold,'' Mr. Litvack says. Stocks in this fund are limited to gold mining companies in South, Central, and North America. The fund's assets grew from $15 million in August 1986 to $90 million in November.
Colonial Investment Services in Boston also offers a fund that does not invest in South Africa. The Colonial Advanced Strategies Gold Trust, which began in June 1985, now has about $31 million in assets. It invests in American, Australian, and Canadian gold mines, avoiding those in South Africa, ``primarily for economic reasons,'' says a Colonial official.