Gold Funds : Basics, Things to Consider and More

In times of market volatility and economic uncertainty, gold has always been a trusted haven for Indian investors. But instead of buying physical gold, more people are now turning to gold mutual funds, a more innovative, hassle-free way to tap into the value of gold. These funds offer the same benefits of gold investment, minus the worries of storage, purity, or making charges. Gold funds could be your golden ticket to diversifying your portfolio with a low-risk asset.

What Are Gold Funds?

Gold funds are mutual funds that invest in gold-related assets, primarily Gold Exchange Traded Funds (ETFs). These funds don’t invest in physical gold directly, but they track the price of gold through these ETFs, making them a convenient and safe alternative to holding physical gold.

So instead of worrying about purity, locker charges, or theft, you can invest in gold through these funds using a mutual fund platform or app. Gold funds are open-ended, professionally managed, and ideal for those who want gold exposure without the complications of buying jewellery or coins.

Gold funds benefit investors who want to benefit from the long-term value appreciation of gold but aren’t comfortable trading on the stock exchange or owning a demat account. You can start with small amounts through SIPs (Systematic Investment Plans), making it accessible for even first-time investors. Since gold often performs well during inflation or market downturns, these funds hedge against market risks, helping balance your overall portfolio.

How do gold funds work?

Gold funds are mutual fund schemes that don’t directly invest in physical gold but instead channel your money into Gold Exchange Traded Funds (Gold ETFs). These ETFs hold physical gold of high purity (usually 99.5%) and are traded on stock exchanges. So, when you invest in a gold fund, you’re indirectly investing in gold through the ETF route.

Here’s how it works in simple steps:

• You invest in a gold mutual fund as a lump sum or via SIP.
• The fund manager uses that money to buy units of Gold ETFs.
• Gold ETFs are backed by real physical gold, which is stored securely by the custodian.
• As the market price changes, the value of these ETFs fluctuates.
• Accordingly, your gold fund's Net Asset Value (NAV) changes.
• Like any other mutual fund, you can redeem your units at the current NAV.

Unlike Gold ETFs, gold funds don’t require a demat or trading account. That makes them more accessible, especially for new or traditional investors who prefer ease of investment. You can invest online through any mutual fund platform or app, and the entire process is digitally managed and transparent.

Another key point is that the fund manager does all the heavy lifting, tracking the gold market, maintaining ETF exposure, and ensuring compliance so you can enjoy gold returns without tracking prices or worrying about buying and storing gold physically.

These funds are beneficial during economic uncertainty or rising inflation, as gold tends to perform well when markets are volatile, offering a safety net to your portfolio.

How Are Gold Funds Different from Gold ETFs?

While gold funds and ETFs offer exposure to the price of gold, they differ significantly in how they work, who they suit, and how easy they are to access.

Gold funds are designed for investors who prefer simplicity and flexibility. You don’t need a demat account, and you can invest through SIPs, making it ideal for salaried individuals or mutual fund beginners. Since fund houses invest in Gold ETFs on your behalf, there’s a small added layer of cost and slightly more tracking error, but the convenience it offers makes it worth it for many.

On the other hand, Gold ETFs are better suited for investors with some market experience and who already have a demat and trading account. They offer better liquidity, real-time pricing, and lower expense ratios, making them efficient for lump-sum investors or those who want to buy/sell during market hours. However, SIPs are unavailable with ETFs, and you’ll need to monitor the market to get the best price.

Advantages of Investing in Gold Funds

• No demat or trading account is required to invest.
• You can start investing with as little as ₹100 or ₹500.
• SIP options are available for systematic monthly investment.
• Fund managers handle portfolio selection and management.
• No hassles related to gold purity, storage, or theft.
• Easy to redeem units at NAV on any business day.
• Adds diversification to your portfolio and reduces risk.
• Acts as a hedge during inflation and economic uncertainty.
• 100% digital investment process, paperless and hassle-free.

Risks and Limitations of Gold Funds

• Gold prices can be volatile in the short term.
• Returns are not guaranteed and depend on market trends.
• A slightly higher expense ratio is due to the double-layer structure.
• Tracking error may reduce the accuracy of the gold price reflection.
• No physical delivery option for the investor.
• Taxed like debt funds, not eligible for equity taxation benefits.
• Not ideal for those seeking regular income or dividends.
• Can underperform in stable or bullish equity markets.
• Returns may lag due to fund management or operational costs.

Who Should Consider Investing in Gold Funds?

Gold funds are well-suited for first-time investors, especially those who don’t have a demat or trading account. Since these funds can be started with small SIPS, they’re ideal for salaried individuals, students, or anyone looking to invest in gold without committing a large amount upfront. The ease of investing through mutual fund platforms also makes it perfect for those who prefer a fully digital and hands-off experience.

These funds are a good choice for people who want to spread out their risk especially when things in the market feel shaky. If you're worried about inflation or want to keep your savings safe during a downturn, gold funds can help. And the best part? You don’t need to worry about buying or storing actual gold. It’s a simple and smart way to get the same benefits without all the trouble.

Taxation Rules for Gold Funds in India

Gold mutual funds are taxed in the same way as debt mutual funds. If you sell your investment within three years, the profit is considered a short-term capital gain (STCG) and is added to your total income. It is then taxed according to your applicable income tax slab rate. For example, if you're in the 20% or 30% tax bracket, the gain will be taxed at that rate. No TDS is deducted when you redeem your gold fund units, but you must disclose and pay the tax when you file your income tax return, LTCG of 20% with indexation benefit.

When Is the Right Time to Invest in Gold Funds?

There’s no denying that gold funds tend to do well when things around us feel uncertain—be it a slowing economy, rising prices, or tensions across the globe. In such times, people usually move their money into safer options, and gold has always been one of the top choices. That’s why you’ll often see gold prices rising when the stock market is shaky or inflation is climbing. By investing in gold funds during such periods, you’re basically adding a safety cushion to your portfolio something that can soften the blow if the equity market takes a hit.

That said, timing the market is never easy, especially with something as unpredictable as global events or inflation trends. That’s why many experts recommend a SIP approach in gold funds so you gradually build exposure over time without worrying about market highs or lows. You don’t have to wait for a crisis to invest in gold funds; even in a balanced portfolio, allocating a small portion (typically 5–10%) to gold can offer long-term stability and an edge against unseen financial shocks.

Conclusion

Gold funds are an easy way to invest in gold without worrying about lockers or complicated trading. They mix convenience with safety and can quietly add balance to your portfolio. If you're not sure where the markets are heading, having a bit of gold through these funds can help. It’s a simple, no-fuss option for anyone wanting peace of mind in uncertain times.