Gold has always been one of the most trusted investment options, especially in countries like India where it holds cultural and financial value. Traditionally, people bought physical gold in the form of jewellery, coins, or bars. However, with the rise of modern financial products, investors now have smarter and more convenient ways to invest in gold — one of them being gold mutual funds.
If you want to invest in gold without worrying about storage, purity, or security, mutual fund investing in gold can be a practical and efficient option. In this detailed guide, we will explain everything in simple language — what gold mutual funds are, how they work, their benefits, risks, taxation, and whether they are suitable for you.
What Is Mutual Fund Investing in Gold?
Mutual fund investing in gold means investing in a fund that primarily invests in gold-related assets instead of physical gold.
Most gold mutual funds in India invest in:
- Gold Exchange Traded Funds (ETFs)
- Physical gold (indirectly through ETFs)
- Gold mining companies (in some international funds)
Instead of buying gold jewellery or coins, you invest money in a mutual fund scheme that tracks the price of gold.
Some well-known gold mutual fund options include:
- HDFC Mutual Fund Gold Fund
- SBI Mutual Fund Gold Fund
- ICICI Prudential Mutual Fund Regular Gold Savings Fund
- Nippon India Mutual Fund Gold Savings Fund
These funds allow you to invest in gold digitally with small amounts.
How Do Gold Mutual Funds Work?
Gold mutual funds are usually fund of funds. This means:
- The mutual fund collects money from investors.
- The fund invests that money into Gold ETFs.
- Gold ETFs invest in physical gold.
- The returns depend on the movement of gold prices.
So indirectly, your investment tracks gold prices.
For example:
- If gold prices increase, the value of the fund generally rises.
- If gold prices fall, the fund value may decrease.
Types of Gold Mutual Funds
1. Gold Savings Funds
These invest mainly in Gold ETFs. They are the most common type in India.
2. International Gold Funds
These invest in global gold mining companies or international gold ETFs.
3. Gold Fund of Funds
These invest in other gold-related mutual funds or ETFs.
Benefits of Investing in Gold Through Mutual Funds
1. No Storage Worries
You do not need a locker or safe. The gold is held digitally.
2. No Purity Issues
You don’t have to check whether gold is 22K or 24K. The fund invests in standardized gold.
3. Start with Small Amount
You can begin with as low as ₹500 through SIP (Systematic Investment Plan).
4. High Liquidity
You can redeem your units anytime (subject to exit load).
5. Portfolio Diversification
Gold acts as a hedge against inflation and market volatility.
When stock markets fall, gold often performs better, helping balance your portfolio.
Gold Mutual Funds vs Physical Gold
| Feature | Gold Mutual Funds | Physical Gold |
|---|---|---|
| Storage | Not required | Required |
| Making Charges | No | Yes |
| Purity Concern | No | Yes |
| Liquidity | Easy | Moderate |
| Safety | High | Risk of theft |
If your goal is investment, mutual funds are usually better than jewellery.
Gold Mutual Funds vs Gold ETFs
Many people get confused between Gold ETFs and Gold Mutual Funds.
Gold ETF
- Traded on stock exchanges
- Requires demat account
- Bought like shares
Gold Mutual Fund
- Does not require demat account
- Can invest through SIP
- Easier for beginners
If you do not have a demat account, gold mutual funds are more convenient.
Risks of Investing in Gold Mutual Funds
Even though gold is considered safe, it still has risks:
1. Price Volatility
Gold prices can fluctuate due to global economic factors.
2. No Regular Income
Gold does not provide dividends or interest (unlike some stocks or bonds).
3. Currency Risk
Gold prices in India are influenced by USD-INR exchange rate.
4. Expense Ratio
Gold mutual funds charge management fees.
Taxation of Gold Mutual Funds in India
Gold mutual funds are taxed as non-equity mutual funds.
As per current taxation rules:
- Short-Term Capital Gains (held less than 3 years): Taxed as per income tax slab.
- Long-Term Capital Gains (held more than 3 years): Taxed as per applicable capital gains rules.
Always check updated tax rules before investing, as regulations may change.
Who Should Invest in Gold Mutual Funds?
Gold mutual funds are suitable for:
- Investors looking for diversification
- People who want exposure to gold without buying jewellery
- Long-term investors (3–5 years)
- Risk-moderate investors
- Investors without demat accounts
If you already invest in equity and debt, adding 5%–15% gold exposure can balance risk.
How Much Should You Invest in Gold?
Financial experts usually suggest:
- 5% to 15% of total portfolio in gold
- Avoid over-investing in gold
- Use gold mainly for diversification, not as main wealth-building asset
How to Start Investing in Gold Mutual Funds
Step-by-step process:
- Complete KYC.
- Choose a trusted mutual fund platform.
- Select a gold mutual fund scheme.
- Decide lump sum or SIP.
- Monitor performance yearly.
You can invest through:
- Mutual fund apps
- AMC websites
- Investment platforms
- Banks
When Is the Best Time to Invest in Gold?
Instead of timing the market:
- Invest through SIP.
- Add gold during market uncertainty.
- Increase allocation when inflation is high.
Gold performs well during:
- Economic slowdown
- High inflation
- Geopolitical tensions
- Stock market crashes
Common Mistakes to Avoid
- Investing too much in gold.
- Buying gold funds for short-term trading.
- Ignoring expense ratio.
- Not reviewing allocation yearly.
- Expecting very high returns like equity funds.
Gold is mainly for stability, not aggressive growth.
Are Gold Mutual Funds Better Than Sovereign Gold Bonds?
Gold mutual funds and Sovereign Gold Bonds (SGBs) are different.
SGBs offer:
- Fixed interest (2.5% annually)
- No capital gains tax on maturity (if held till maturity)
- 8-year lock-in
Gold mutual funds:
- No lock-in (usually)
- More liquid
- Easier for SIP
If you want interest income and can hold long term, SGB may be better.
If you want flexibility and liquidity, gold mutual funds are better.
Performance Expectations from Gold Mutual Funds
Historically, gold gives moderate long-term returns compared to equities.
Gold:
- Protects wealth
- Beats inflation over long periods
- Performs well in crises
- May underperform in strong bull markets
It is a defensive asset.
Final Thoughts
Mutual fund investing in gold is one of the easiest and safest ways to add gold exposure to your portfolio without dealing with physical gold.
It offers:
- Convenience
- Safety
- Liquidity
- Diversification
However, gold should not be your primary wealth creation tool. It works best as a supporting asset in a balanced portfolio.
If you are a moderate-risk investor looking for stability along with equity and debt investments, gold mutual funds can be a smart addition.
FAQs on Mutual Fund Investing in Gold
1. Is gold mutual fund safe?
Yes, it is relatively safe compared to equities, but returns depend on gold prices.
2. Can I start SIP in gold mutual funds?
Yes, most gold mutual funds allow SIP starting from ₹500.
3. Do I need a demat account?
No, demat is not required for gold mutual funds.
4. What is the ideal holding period?
At least 3–5 years for better stability.
5. Are gold mutual funds better than jewellery?
For investment purposes, yes — because there are no making charges or purity issues.
