Gold Mutual Funds Explained: How They Work And When Investors Should Consider
Gold has fascinated Indian investors for centuries from temple treasures to family heirlooms. But the pattern of investing in gold has changed dramatically. Nowadays, you do not need to visit a jeweller or worry about a locker.
Gold mutual funds bring the timeless value of gold into a paperless, affordable, and also the highly liquid investment INR 100.
The numbers speak for themselves. In the year 2025, gold delivered an extraordinary return of approximately 67.7% in INR terms which is the highest annual return in the last three decades — and its driven by central bank accumulation, a weakening US dollar, geopolitical tensions, and the Russia-Ukraine war. Meanwhile, the Nifty 50 returned around 9.3% during the same period.
For investors who had allocated even a small portion of their portfolio to gold mutual funds, the results were remarkable. But what exactly are gold mutual funds, how do they generate returns, and when should you seriously consider adding them to your portfolio? Let's break it all down.
Gold Vs Nifty 50 - Annual Return Comparison (2020–2025)
| Year | Gold Returns (INR) | Nifty 50 Returns | Winner |
| 2020 | 28% | -26% (Mar low, recovered to +15%) | Gold |
| 2021 | ~-4% | +24% | Nifty |
| 2022 | ~11% | ~4% | Gold |
| 2023 | ~13% | ~20% | Nifty |
| 2024 | ~17% | ~24% | Nifty |
| 2025 | ~67.7% | ~9.3% | Gold |
Source:Indmoney1
How Gold Mutual Funds Generate Returns
Gold mutual funds are classified as Fund of Funds (FoF) because they do not directly hold physical gold but rather invest in Gold ETFs, which in turn track the domestic price of gold. Lets understand this with the help of exmaple that how the return chain works:
Priya starts a monthly SIP of INR 2,000 in a gold mutual fund in January 2023. Over 24 months, gold prices rise by approximately 35%. Her total investment of INR 48,000 grows to approximately INR 61,500 — a gain of INR 13,500 — without her ever touching a gram of physical gold. She didn't need a Demat account, and she could redeem any day directly through her mutual fund app.
- Price Appreciation of Gold
Gold mutual funds generate returns primarily through the appreciation of gold prices. When global demand rises — due to inflation fears, geopolitical crises, or central bank buying — gold prices go up, and NAV (Net Asset Value) of the fund rises correspondingly. Since Indian gold prices are also influenced by USD/INR exchange rates, a depreciating rupee further boosts returns for Indian investoINR
- Fund Structure and Expense Ratio
Since gold mutual funds are FoF schemes that invest in ETFs, they carry a slightly higher expense than direct ETFs — typically ranging from 0.10% to 0.50% annually. However, their biggest advantage is that they do NOT require a Demat or trading account, making them accessible to first-time investors and SIP saveINR
Table 2: Top Gold Mutual Funds — Returns & Expense Ratios (2025–2026)
| Fund Name | 3Y Returns | 5Y Returns | Since Inception CAGR | Expense Ratio |
| SBI Gold Fund | ~39% | ~28% | ~9.9% | ~0.10% |
| HDFC Gold Fund | ~39.6% | ~27.8% | ~9.86% | ~0.15% |
| ICICI Pru. Gold ETF FoF | ~39.7% | ~27.5% | ~9.78% | ~0.13% |
| Nippon India Gold Savings | ~38.5% | ~27.3% | ~9.70% | ~0.16% |
| Kotak Gold Fund | ~39.3% | ~27.0% | ~9.91% | ~0.14% |
Source: kotakmf2
Benefits Of Investing In Gold Mutual Funds
1. No Storage Risk: Physical gold requires vaults, lockers, and insurance. Gold mutual funds eliminate all of this that your units are held digitally in your mutual fund portfolio, secured and regulated by SEBI.
2. Liquidity Advantage: Unlike physical gold (where selling involves finding a buyer, verifying purity, and negotiating making charge deductions), gold mutual funds can be redeemed on any business day at the prevailing NAV. Funds are typically credited within 2-3 business days.
3. Start Small with SIP: You can begin investing with as little as INR 100 per month via SIP. This rupee-cost averaging approach means you automatically buy more units when gold is cheap and fewer when it's expensive — a disciplined long-term strategy.
4. No Purity Concerns: The gold held by the underlying ETF is 24-carat, 99.5% pure. No risk of adulteration or fraudulent hallmarking.
5. SEBI Regulated & Transparent: All gold mutual funds are regulated by the Securities and Exchange Board of India (SEBI). Fund NAVs are published daily, ensuring complete price transparency.
Gold Mutual Funds Vs Other Gold Investment Options
Investors have multiple ways to gain exposure to gold. Understanding the differences helps you pick the right instrument for your goals, timeline, and convenience.
Table 3: Comparing Gold Investment Options in India
| Feature | Gold Mutual Fund | Sovereign Gold Bond | Physical Gold | Gold ETF |
| Demat Required? | No | Yes | No | No |
| Min. Investment | INR 100 SIP | INR ~6,000+ | INR 1 gm | INR 1 unit (NSE) |
| Storage Concern | None | None | Yes | None |
| SIP Available? | Yes | No | No | No |
| Purity Risk | None | None | Yes | None |
| Liquidity | T+2 to T+3 | T+1 | Low | T+1 |
| Expense | 0.10%-0.50% | 0.10%-0.20% | Making charges | 0.10%-0.20% |
| SEBI Regulated? | Yes | Yes | No | Yes |
While Sovereign Gold Bonds (SGBs) offer an additional 2.5% annual interest on top of gold price appreciation, they are currently unavailable for fresh subscriptions (as of 2026). Gold ETFs offer the lowest expense ratios but require a Demat and trading account.
Physical gold comes with making charges of 10–25%, storage costs, and purity risk.
For most retail investors — especially those investing via SIP without a Demat account — gold mutual funds offer the ideal combination of accessibility, liquidity, and cost-efficiency.
Gold As A Portfolio Diversifier
One of the gold's most powerful roles is as a portfolio diversifier. Gold has historically shown a low to negative correlation with equities which means when stocks fall sharply, gold often rises or holds steady.
Consider a simple two-asset portfolio: 80% Nifty 50 index fund and 20% gold mutual fund. In the year 2020, when the Nifty crashed nearly 26% in March, gold gained approximately 28% over the calendar year — cushioning the blow significantly. A pure equity investor would have seen panic-inducing red; a balanced investor would have been far more composed.
Taxation of Gold Mutual Funds in India
As of the latest tax regulations applicable in FY 2025-26:
- Short-Term Capital Gains (STCG): If units are sold within 24 months, gains are added to your income and taxed at your applicable slab rate.
- Long-Term Capital Gains (LTCG): If held for more than 24 months, gains are taxed at 12.5% without indexation benefit.
- No TDS is applicable on mutual fund redemption for resident individuals.
Conclusion
Gold has long held a special place in Indian portfolios, but the way investors access it has evolved. Gold mutual funds combine the traditional value of gold with the convenience of modern investing. They also allow the investors to participate in gold price movements without worrying about storage, purity, or large upfront investments. With the ability to start SIPs with small amounts and redeem units easily, these funds make gold accessible into a wider group of investoINR
It can be said that in the terms of multiple portfolios, gold works best not as the main asset but as a stabiliser. During periods of inflation, geopolitical uncertainty, or stock market volatility, gold often moves differently from equities, which helps to reduce the overall portfolio risk. Allocating a modest portion of investments to gold mutual funds can therefore improve diversification and long-term balance.
Platforms like Grip Invest are increasingly helping investors explore different asset classes beyond traditional options. While gold mutual funds remain a convenient way to gain exposure to gold prices, investors can also look at other fixed-income opportunities available on Grip Invest, such as curated corporate bonds and fixed deposits, to build a more diversified and income-focused portfolio.
At the end, the goal is not choosing one asset over another but building a portfolio that combines growth, stability, and diversification. Gold mutual funds can play an important role in that strategy when used thoughtfully.
FAQs On Gold Mutual Funds 2026
1. What are gold mutual funds?
Gold mutual funds are open-ended Fund of Funds (FoF) schemes that invest in Gold ETFs (Exchange Traded Funds). These ETFs hold physical gold bullion and track its domestic price. You earn returns based on gold price appreciation, without ever owning physical gold.
2. Are gold mutual funds safe investments?
Gold mutual funds are regulated by SEBI and are considered medium-risk investments. While they are subject to gold price volatility and currency fluctuations, they eliminate risks associated with physical gold such as theft, storage, and purity concerns. They are considered safer than equities but carry more risk than fixed deposits or sovereign bonds.
3. Do gold mutual funds track gold prices?
Yes, gold mutual funds closely track domestic gold prices through their investments in Gold ETFs. However, minor differences (called tracking error) may exist due to expense ratios and cash holdings. The correlation is typically very high — above 98% — for most well-established gold funds.
References:
1. Indmoney, accessed from: https://www.indmoney.com/blog/mutual-funds/difference-between-gold-etf-and-gold-fund
2. KotakMFhttps://www.kotakmf.com/Information/blogs/what-is-a-gold-fund_
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