What Are Gold Funds? Meaning, Types & How They Work

What Are Gold Investment Funds?

Gold investment funds are mutual fund schemes that primarily invest in gold-backed securities or gold ETFs. Instead of purchasing physical gold, investors gain exposure to price movements of the metal through a professionally managed portfolio.

In simple terms, a precious metal fund allows you to invest in gold without worrying about storage, purity, or security, while still participating in potential market gains. These schemes are ideal for those seeking to diversify their portfolio with an asset known for hedging against inflation and economic uncertainty.

How Do Precious Metal Funds Work in India?

In India, gold-linked mutual funds typically invest in gold ETFs, which are backed by physical gold stored in secure vaults. The fund manager purchases units of these ETFs on behalf of investors, enabling the scheme’s net asset value (NAV) to move in line with gold prices.

Returns from these schemes are linked directly to market gold rates, and investors can buy or redeem units through their mutual fund accounts. Precious metal funds simplify gold investing and are regulated by SEBI, ensuring transparency and compliance with Indian regulations.

Types of Gold Mutual Fund Schemes in India

Investors in India can select from several types of gold investment funds:

1. Regular Gold Mutual Funds – Invest primarily in ETFs and offer long-term wealth preservation.

2. Gold Index Funds – Track a gold price index, providing returns that mirror market rates closely.

3. Systematic Gold Investment Funds – Designed for monthly SIPs, allowing gradual accumulation of gold exposure.

Each type caters to specific goals, whether it’s capital appreciation, risk management, or regular investment in gold.

Gold Funds vs Physical Gold vs Sovereign Gold Bonds

There are multiple ways to invest in gold, each with distinct features:

• Precious Metal Funds: Easy to buy and sell, no storage concerns, professionally managed.

• Physical Gold: Tangible asset but requires secure storage and may include making charges.

• Sovereign Gold Bonds (SGBs): Government-backed, offer annual interest, redeemable at maturity, but less liquid compared to mutual fund schemes.

Choosing the right option depends on your investment horizon, liquidity requirements, and risk tolerance.

Benefits of Investing in Gold-Linked Mutual Funds

Investing in these schemes offers several advantages:

• Ease of Investment: No need for physical storage or insurance.

• Liquidity: Units can be easily bought or sold through mutual fund accounts.

• Portfolio Diversification: Gold often behaves inversely to equities, providing balance during market volatility.

• Professional Management: Fund managers handle portfolio allocation and market strategies.

These benefits make gold-linked mutual funds a convenient option for investors seeking exposure to the precious metal.

Risks Associated With Gold Investment Funds

While beneficial, these schemes carry certain risks:

• Market Risk: Returns depend on fluctuations in gold prices.

• Currency Risk: For funds linked to international ETFs, exchange rate movements can impact returns.

• Expense Ratio: Management fees from both the fund and underlying ETFs may slightly reduce returns.

Investors should understand these factors before including gold-linked schemes in their portfolio.

Taxation of Gold-Linked Mutual Funds in India

Tax rules for these schemes depend on the holding period:

• Short-Term Capital Gains (STCG): Units held for less than three years are taxed at the investor’s income tax slab rate.

• Long-Term Capital Gains (LTCG): Units held for more than three years are taxed at 20% with indexation benefits.

Tax implications should be considered when planning investments to maximise post-tax returns.

How to Invest in Gold Mutual Funds?

Investing in precious metal funds is simple:

1. Complete KYC: Ensure Know Your Customer compliance is up to date.

2. Select a Fund: Choose a scheme based on objectives, past performance, and expense ratio.

3. Investment Mode: Opt for lump sum or systematic investment plans (SIPs).

4. Monitor Returns: Track NAV and gold market trends periodically.

Online mutual fund platforms make it convenient for retail investors to access these schemes.

Who Should Consider Gold-Linked Mutual Funds?

These schemes are ideal for investors seeking:

• Long-term wealth preservation and protection against inflation.

• Diversification without holding physical gold.

• Moderate exposure to precious metals within a balanced portfolio.

They may not suit short-term investors or those preferring tangible assets with direct ownership.

Things to Consider Before Choosing a Gold-Linked Fund

Before investing, keep the following in mind:

• Fund Type: Regular, index-linked, or SIP-oriented schemes.

• Expense Ratio: Lower fees can improve overall returns.

• Past Performance: Look for consistent historical performance, though past results do not guarantee future gains.

• Liquidity Needs: Ensure the scheme aligns with redemption requirements.

This evaluation helps investors choose a fund that matches financial goals and risk appetite.

Conclusion

Gold investment funds provide a convenient, liquid, and professionally managed avenue for investing in gold without the challenges of physical ownership. While they offer diversification and inflation protection, investors must assess market risks, fees, and tax implications. With careful selection, gold-linked mutual funds can be a valuable addition to a diversified portfolio.