What is a Gold Fund?

Gold funds are a type of mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies. It is a convenient way to invest in an asset without having to purchase the commodity in its physical form.

Gold mutual funds are open-ended investments, based on the units provided by the gold Exchange Traded Fund. As the underlying asset is held in the form of physical gold, its value is directly dependent on the price of this precious metal.

These funds can also be used as a hedge to protect an investor against economic shock. Many individuals diversify their investment portfolio with 10% to 20% investment into gold funds as a means to secure themselves from the fluctuating market.

What is the Purpose of Gold Funds?

The primary purpose of these types of investments is to create wealth during investment tenor and create a cushion against market collapse. Because of gold’s varying prices, the performance of its underlying stocks often differ greatly; for example, even a tiny change in gold’s global market price can cause substantial alterations in its stock’s return. The return of the best gold funds can even outgrow the actual price of the precious metal itself, which can create a lucrative opportunity for investors.

If an investor opts for long-term (8 years or longer) gold mutual funds, the returns received will be calculated based on the current market’s gold prices. It can provide a significant return if the price of gold increases at the time of redemption.


Taxation of gold mutual funds India is similar to taxes implied on gold jewellery. Taxes are also levied depending on the investment tenor; if the date of investment and date of redemption is less than three years, it is considered as a short-term investment. In this case, the revenue is added to the investor’s gross income to calculate tax.

If the tenor is longer than three years, its returns are considered as long-term investment and are taxed at 20% along with indexation norms. One might also have to pay CESS over other applicable taxes.

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Any capital gain from long-term investments into gold ETFs is tax exempted. Moreover, the Income Tax Department of India do not levy any Tax Deducted at Source at the time of maturity or trading of gold mutual funds.

Who Should Invest In Gold Funds?

Gold mutual funds are ideal for investors who want to diversify their portfolio and lower the risk of investment. It is regulated by the SEBI, which lowers the risk associated with investing in a mutual fund.

The fund is invested into gold bullions, a physical asset that is mostly independent of fluctuating financial markets. That makes it suitable for conservative investors as well.

Investors looking to save on taxes can also opt for gold funds. TDS is not applicable on these types of investments; instead, only the taxes applicable to buying and selling jewellery is levied on these funds.

Major Advantages

There are several advantages of investing in gold mutual funds in India. Let’s take a look.

  • Flexible investment amount – Gold funds offer greater convenience than physical gold as it allows an investor to purchase any amount of funds as per their requirement. One can invest as low as Rs. 500, which allows individuals with low income to invest in this type of funds. Instead of purchasing physical gold, which often carries a significantly high cost, it offers more flexibility to an investor.
  • Highly liquid investment – Another major advantage of a gold mutual fund is that it can be liquidated in short notice and without much hassle. Trading these funds is easier than liquidating other types of assets, which makes them ideal as a financial cushion to protect against an unforeseen incident. Also, there is no lower limit on redeemable amount, allowing an individual to redeem according to their unique financial requirement.

These funds can be redeemed during the market hours of any working day. However, at the time of selling, the NAV of the previous day will be taken into account. The money is usually disbursed within 2 to 3 business days once the funds are traded off.

  • Safe investment avenue – Gold funds are one of the safest investment options, as these mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI periodically monitors and reports on the condition of these funds, which can help investors measure and predict their returns.
  • Diversify investment portfolio – Gold mutual funds are an excellent investment option to diversify one’s investment portfolio and reduce overall market risk. As a physical asset, gold prices are not directly related to company stocks. Investors can minimise market risk by assuring return when other asset classes are performing poorly.
  • Safer than owning physical gold – Gold funds are electronic investments, which eliminate the hassle of storing physical gold. Because of its dematerialisation form, it is one of the safest alternatives to investing in a physical asset available in today’s market.

Introduces investment discipline – These funds help new investors learn about the crucial disciplines of investment Investing in gold through SIP requires an individual to put a particular amount in these funds every month, which introduces the habit of saving. Investors can also learn financial discipline by investing in these funds for long or short-terms.

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