Gold Mutual Funds in India: How They Work and Benefits

• Gold mutual funds let you invest in gold without buying or storing physical gold, making them a convenient option for modern investors.
• You can start a SIP gold investment in gold funds with as little as Rs 100 per month, making it accessible at any income level.
• Returns on gold mutual funds are linked to gold prices, and tax on gold mutual funds applies based on how long you hold the investment.

Not everyone who wants to invest in gold wants to buy a biscuit or visit a jewellery store. Gold mutual funds offer a simpler alternative to physical and digital gold investments by giving investors exposure to gold without the hassle of storage. You invest money, the fund invests in gold on your behalf, and your returns move with the gold price. This guide explains how it works in simple terms.

Gold mutual funds are funds that invest in gold. More specifically, most gold-based mutual funds in India are funds of funds, meaning they invest in gold ETFs rather than directly buying physical gold. This structure makes them easy to buy and sell like any other mutual fund, without needing a demat account.

A gold ETF mutual fund holds units of a gold ETF, which in turn holds physical gold. So when you invest in a gold fund of funds, you are indirectly backed by real gold sitting in a certified vault.

When you invest in a gold MF, your money goes into a fund that purchases units of a gold ETF. The value of your investment goes up or down based on the price of gold in the market. If gold prices rise, the value of your fund units rises too. If gold prices fall, your investment value dips accordingly.

The key advantage over a gold ETF is that you do not need a demat account to invest. You can buy and sell gold-related mutual funds directly through any mutual fund platform or app, just like you would invest in any equity or debt fund.

Also Read: Digital Gold ETF Explained: What You Need to Know?

One of the biggest advantages of gold mutual funds is the ability to start a SIP. A SIP gold investment lets you invest a fixed amount every month, as low as Rs 100 on some platforms, and gradually build your gold holdings over time.

This is particularly useful for investors who cannot afford to buy a gold coin or bar upfront but want to accumulate gold steadily. Over time, SIP also helps average out the cost of your investment across different gold price levels.

1. Gold ETF Mutual Fund

An ETF gold mutual fund invests directly in physical gold and is listed on stock exchanges. To invest in a gold ETF, you need a demat account. Returns closely track the actual gold price.

2. Gold Fund of Funds

A gold fund of funds invests in gold ETFs rather than directly in gold. No demat account is needed. This is the most accessible option for regular investors and is what most people refer to when they talk about gold MF funds.

3. Gold Savings Fund

A gold savings fund is essentially just another name for a gold fund of funds. It allows SIP investments and is designed for investors who want a simple, low-barrier way to invest in gold regularly.

Gold mutual fund returns are directly linked to gold prices. Over the long term, gold has shown consistent appreciation in India. Here is a general picture of how gold fund returns have looked historically.

Note: Past returns are indicative and do not guarantee future performance. Actual returns vary by fund and market conditions.

Gold fund returns can be strong during periods of global uncertainty, inflation, or rupee depreciation. They tend to underperform during periods when equity markets are doing very well.

Understanding tax on gold mutual funds is important before you invest. The rules changed in 2023, and here is how they currently apply.

So if you hold your gold mutual fund investment for more than 24 months, you pay 12.5% tax on the profit. If you sell before that, the gains are added to your income and taxed at your applicable slab rate. No GST applies on gold mutual fund purchases, which is an advantage over physical gold and digital gold.

Also Read: GST on Digital Gold, Gold ETF and Investments Explained?

1. No Storage Hassle

You do not need to worry about where to keep your gold. The fund handles everything on your behalf.

2. No Demat Account Needed

Unlike gold ETFs, gold fund of funds can be bought through any mutual fund app without a demat account.

3. Start Small with SIP

A SIP gold investment lets you begin with very small amounts and build wealth gradually over time.

4. High Liquidity

You can redeem your gold mutual fund units on any business day and get the money in your bank account within a couple of days.

5. No GST

Unlike physical or digital gold purchases, buying gold-related mutual funds does not attract GST. This makes them slightly more cost-efficient at the point of entry.

6. Transparent Pricing

The NAV of gold funds is published daily and directly reflects gold prices, so you always know what your investment is worth.

1. Expense Ratio

Gold mutual funds charge an annual expense ratio, typically between 0.1% and 0.5% for ETFs and slightly higher for funds of funds. This amount is deducted from your returns automatically.

2. Returns Are Market-Linked

Gold fund returns are not guaranteed. They move with gold prices, which can be volatile in the short term.

3. Not Ideal for Very Short Term

If you are looking to invest for less than a year, gold mutual funds may not be the best fit. They work best as a medium- to long-term investment.

Gold mutual funds are one of the most accessible and practical ways to invest in gold in India today. Whether you want to do a monthly SIP gold investment, invest a lump sum, or simply diversify your portfolio with gold exposure, a gold MF gives you all of that without any of the hassle of buying and storing physical gold. You can also explore gold investment options through the Aditya Birla Capital platform, powered by MMTC-PAMP. You can visit their website or download the ABC app to get started.