Gold Mutual Funds Explained: Beginners Guide 2025 

Gold has always held a special place in the hearts and households of us Indians. Gold is not just a metal or jewellery for us, but also a trusted and timeless form of investment. And if you have been following Gold recently, you know that gold is back in the spotlight. In fact, over the last five years, gold has actually outperformed equities, helping investors with positive returns when the stock markets have struggled to keep their pace. 

With investors looking at Gold once again with renewed interest, Gold Mutual Funds have stood out as one of the easiest and most practical choices to invest in Gold in 2025. Today, we take a look at Gold Mutual Funds and provide you a complete guide to them. 

Quick Summary: 

• Why Gold: Effective hedge against inflation/currency and a diversifier when equities stumble; 

• Gold Mutual Funds: Open-ended funds that invest in Gold ETFs (which hold physical gold), so NAV closely tracks domestic gold prices. 

• Why they’re practical: No Demat, invest from ₹100, SIP/Lump Sum/STP options, no storage risk, SEBI-regulated. 

• Watch-outs: Higher TER than ETFs, tracking error, no SGB interest, and taxable gains. 

• How to choose: Prefer low tracking error, low TER, and Information Ratio closer to 0 (better replication consistency). 

• Bottom line: Don’t replace core equity/debt. Use Gold Mutual Funds as a measured allocation to add stability and diversification. 

Why Gold Matters in your Portfolio 

Gold is often considered as a safe haven for investors. Unlike equities, which move in tandem with the overall economic and company backed performance, gold derives it value from its scarcity, global demand, and its role as a hedge against inflation as well as currency depreciation.

And if the relevance of Gold as a hedge was doubted a few years back, the recent performance has yet again proved its importance. 

And rightly so, Gold has been a go to option for investors to diversify their portfolio. When equity markets struggle, gold often shines. During global uncertainties or economic downturns, gold helps you balance the risk and provide stability to your portfolio. 

To put things in perspective, we compared how an investment of ₹10,000 in Nifty 50 as well as Gold 10 years back would have turned out today. Here’s the chart. 

Source: EduFund Internal Research, Investing.com 

If you would observe, during normal phases of the markets, Equity and Gold went hand in hand. But when uncertainties took over globally in equity markets, Gold often proved out to be as a hedge, helping stabilise the portfolio. And because of the recent outperformance, a ₹10,000 investment in Gold grew to ₹41,381 vs Nifty 50’s growth of ₹29,021. 

Does this mean that you should invest only in Gold? Definitely not. But it does prove a strong case for Gold’s allocation in your portfolio.  

Different Ways to Invest in Gold in India 

• Physical Gold: Traditional way of investment. But comes with storage risks. 

• Digital Gold: Convenient to buy. You can buy as low as ₹10 but it is unregulated space in India 

• Gold ETFs: Closely tracks actual gold price. But you need a demat account to invest 

• Sovereign Gold Bonds (SGBs): Once the best option to invest in Gold in India due to tax and extra interest benefits. But now that the fresh issues have been discontinued in India, buying from secondary market requires careful evaluation. 

• Gold Mutual Funds: Mutual Funds but investing in Gold. The most hassle-free and practical option today for retail investors in India. Let us understand why 

What is a Gold Mutual Fund? 

A Gold Mutual Funds or Gold Funds as they are popularly called, are open-ended Mutual Fund schemes that primarily invest in Gold ETFs. These Gold ETFs in turn, invest in Physical Gold thereby closely tracking the actual price of the gold. 

Advantages and Disadvantages of Gold Mutual Funds 

As you would notice, the benefits far outweigh the limitations making Gold Mutual Funds the most practical option for investments in Gold in India.  

Taxability of Gold Mutual Funds in India 

Gains earned in Gold Mutual Funds are taxable in India. They are divided into 2 kinds of gains majorly:

• Short Term Capital Gain: If you redeem your investments within 2 years, any gains on your investments are taxable at your applicable slab rate. 

• Long Term Capital Gain: If you redeem your Gold Funds after a period of 2 years, gains are taxable at a rate of 12.5% without the benefit of indexation. 

Before you go ahead and invest, 

How to Choose the right Gold Fund? 

 Just like index funds, not all Gold Mutual Funds are the same. The return that you earn while largely depends on the gold price, it is also important for you to earn returns as close to actual gold prices. So here are the key factors that you should check before investing: 

1. Tracking Error: Tracking Error measures the extent to which the fund returns deviate from their benchmark returns which is gold prices in this case. A lower tracking error is better. 

2. Total Expense Ratio (TER): This is the fees that the AMC charges to manage your fund. This directly impacts your return as these fees get deducted from your gross returns. Lower is better. 

3. Information Ratio: Information Ratio measures how consistently the fund manager is able to deliver returns compared to the benchmark. A ratio closer to 0 is preferrable. 

Choosing a Gold Fund that best fits these key factors will ensure that your returns closely track the actual returns of the gold price in India. 

Closing Notes 

 Gold has proved time and again that it is not just an investment made out for its shining colour, but actually a smart financial investment. It helps an investor protect against inflation, diversify their portfolio thereby reducing risk and volatility, and also outperform other asset classes in uncertain phases.

While equity, debt, or other asset class should remain at the core of your investment portfolio, an allocation in Gold can give your portfolio the balance and resilience that it needs. And Gold Mutual Funds, like we just learnt are undoubtedly the best option to invest in Gold. 

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Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security.  The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment.  The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market

About the author

Niraj Satnalika

Head Of Research,EduFund

Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.