Gold Mutual Funds: Basics, Things to Consider & Other Details

9 min read • Published 20 October 2022
Written by Vaibhav Khandelwal
Best Gold Mutual Funds To Invest in India 2022

Gold has always been a valuable commodity. However, investing in gold tends to carry many challenges. The performance of gold-related stocks may vary significantly. Even a small change in the global market price of gold may result in significant alterations in the prices of its stocks. That is why many investors prefer investing in gold mutual funds.

This blog explores the basics of these mutual fund schemes. Read on to know more. 

What Is a Gold Mutual Fund?

These open-ended mutual fund schemes directly or indirectly invest in gold reserves. Usually, the AMC (Asset Management Company) invests in stocks of gold producing or distributing syndicates, stocks of mining companies, Gold ETFs and physical gold.

In India, gold mutual funds primarily invest in gold Exchange Traded Funds (ETFs). Gold ETFs are tradable funds that keep track of the price of the precious metal. They are listed on major stock exchanges just like equity shares.

Also Read: Top Performing Mid Cap Mutual Funds to Invest in 2022

How Does a Gold Mutual Fund Work?

In India, gold mutual funds follow the structure of the fund of funds. When an investor invests in these mutual funds, the AMCs use the money to purchase units of gold ETFs, which in turn invest in physical gold. After this, the fund house will allocate units to investors proportional to their investments in the scheme.

Considering the fact that the underlying asset of gold ETFs is physical gold, the value of the gold mutual fund units depends on the price of the commodity. When there is a rise in gold prices in the market, the value of investments will grow similarly. 

Gold mutual funds help investors create long-term wealth and act as an economic cushion when the market faces hard times.

Also Read: Commodity Mutual Funds – Types, Benefits and Things to Know before Investing

Benefits of Gold Mutual Funds

Listed below are the various benefits associated with gold mutual funds:

  • A safer option during economic uncertainties 

Gold mutual fund investments tend to be safer when markets experience a downfall. Therefore, there is a possibility that you will earn better returns for your investment in these mutual fund schemes. This is especially because gold prices tend to increase when the market is financially struggling.

  • Low acquisition cost

With gold mutual funds, investors only need to be aware of the expense ratio and exit load. This lies in stark contrast to the expenses related to physical gold. While purchasing gold, buyers have to bear  ‘making charges’ for the jewellery, GST, customs duty, etc. One does not have to pay these charges for investing in gold mutual funds.

  • A good option for portfolio diversification

Investing in gold mutual funds is a good way to diversify a portfolio. For example, suppose the majority of an investor’s portfolio consists of equity/equity-linked instruments. In such a situation, investments in the best gold mutual funds would not just ensure diversification but also provide stability to the portfolio. 

Also Read: Gold ETFs: Features & Benefits, Investment Process & Tax Efficiency

  • Easier to store safely

When you own physical gold in the form of jewellery, concerns remain regarding it getting stolen. You have to select a safe storage space as well, which increases the cost of investing. By investing in the top gold mutual funds, investors get to enjoy the benefit of investing in pure gold without these problems.

  • High liquidity

You can easily buy or sell from the AMC (Asset Management Company). However, this is not the case with physical gold. People who buy or sell gold have to often undergo a tedious process. Moreover, there is no assurance that they will receive a fair market price for physical gold if they face a financial emergency. 

  • No concerns regarding its purity

When you buy gold, especially jewellery, there might be concerns regarding its purity. However, this problem will not occur if you invest in units of gold funds. It is the responsibility of the AMC (Asset Management Company) to maintain the purity of the gold that they use as security while issuing units to their gold fund investors.

Read More: Invest in the Best Balanced Mutual Funds of 2022

Who Should Invest in a Gold Mutual Fund? 

Given are the various types of investors who may prefer investing in gold funds:

  • These mutual funds are preferred by investors who wish to diversify their portfolios and reduce its overall risk.
  • Historically gold is one of the safest investment options during economic crisis, so risk-averse investors can choose gold funds.
  • Gold mutual funds are suitable for people who want to invest in gold but cannot afford to buy gold coins or jewellery. Since gold funds allow investors to invest via SIPs (Systematic Investment Plans), they can take exposure to gold with a small investment amount.

Taxation Rules of Gold Mutual Funds 

Gold mutual funds are subject to the same taxation rules as debt mutual funds. Here, the tax rate depends on the capital gains and holding period of the investments. Below are the taxation rules’ details: 

  • If an investor holds gold mutual fund units for less than three years before redemption, it is considered STCG (Short Term Capital Gains). The applicable tax rate for such capital gains depends on the investor’s tax slab rate. 
  • If the holding period is three years or more, the returns are considered LTCG or Long Term Capital Gains. In such cases, the applicable tax rate is 20% with indexation. Additionally, CESS might need to be paid over other taxes.

Tax Amendment : With recent change in Budget 2023, all the gains from gold mutual funds will be considered as short term capital gains and taxation would be as per applicable tax slab rates.

Also Read: Gold ETF Taxation

How are Gold Funds Different from Gold ETFs? 

This table provides the differences between gold mutual funds and gold ETFs (Exchange Traded Funds: 

Differentiating Factor Gold Mutual FundsGold ETFs
PricingPrices of gold mutual fund units are visible in the form of NAV at the end of trading hours.Gold ETFs are listed on stock exchanges. So investors receive real-time updates on its price. 
Minimum Investment Amount Investors can start their SIPs with a minimum amount of Rs. 100. The minimum investment amount depends on the prevailing market prices of gold. 1 unit of gold ETF is equal to 0.01 gram to 1 gram of gold. 
Liquidity Investors can redeem gold fund units by selling them back to the fund house based on the day’s NAV. Gold ETFs are tradable on stock exchanges. Gold ETFs are fairly liquid.
Transaction CostsInvestors may have to pay an exit load if they wish to redeem the units.Gold ETFs do not involve any transaction cost apart from brokerage charges if applicable. 
Mode of InvestmentOne can invest in gold mutual funds via SIPs or lumpsum.Gold ETFs do not allow SIPs. Transactions can only be done through a broker and a Demat account.
Expense RatioGold mutual funds invest in gold ETFs. So, the expense ratio of a gold fund includes the expense ratio of a gold ETF. Though investors have to pay an expense ratio and brokerage fees for gold ETFs, these costs are lower than that of gold mutual funds.

Things to Consider Before Investment 

Listed below are the various things to consider before you invest in gold mutual fund schemes:

  • Fund management fees

The ‘fund of fund’ structure that these mutual fund schemes follow in India comes with a higher expense ratio. The expenses are higher than the expenditure involved in directly investing in Gold ETF. However, gold mutual funds’ expense ratio is lower than physical gold. 

  • Expected returns

Investments in gold generate relatively higher returns when the market undergoes a slump. However, at other times, investors might see it underperforming compared to other asset classes. This is why many investors consider gold more of a hedge than an investment opportunity. 

  • Investment objective 

These mutual funds aim to use the growth potential of gold and increase the investor’s capital over the entire investment tenure. 

  • Risks from price volatility 

Changes in gold prices cause the NAV (Net Asset Value) of gold mutual funds to fluctuate. This is because the differences in the daily demand and supply of precious metals influence their market price. This is the reason why these mutual fund schemes are sometimes considered to carry moderately high risks.

  • Current economic conditions

It is important to check the prevailing market conditions before investing in a gold mutual fund. One way to do this is to check the historical price movements, which will give you a rough idea about a suitable entry point for your investment.

  • Asset allocation 

Gold is best suited to diversify an equity-oriented portfolio as its performance is negatively correlated to equities. Moreover, gold tends to perform well during periods of market recession and poorly during periods of economic growth. Therefore, investors will want to dynamically allocate their money to gold funds as per their risk appetite and market trends.

Final Word

Gold mutual funds offer an easy and affordable way for investors to integrate gold into their portfolios without the high costs and other inconveniences associated with the physical commodity. One can invest in gold to diversify the risks of an equity-heavy portfolio. Gold investments perform well in periods of economic uncertainties, and thus, work well as a hedge against inflation. 

Frequently Asked Questions

Is it safe to invest in gold mutual funds?

Yes, it is a safe investment option because it generates good returns, especially in bearish markets. Further, it has the ability to appreciate and resist in unstable market situations.

How to invest in gold mutual funds? 

You can invest in gold funds either online or offline directly with mutual fund distributor. You may consider investing in gold funds through the SIP route with just Rs 100 per instalment.

Why should I invest in gold mutual funds? 

By investing in Gold MFs, you can benefit from the potential value of gold without actually owning physical gold. They can be used to protect against geopolitical insecurity and inflation, while diversifying your investment portfolio. 

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Vaibhav Khandelwal

Credit Principal
Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector. Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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