10 Jun 2025
Gold has long been a preferred investment option for Indian investors. With changing times, the way people invest in gold has also evolved. Enter gold funds a smart, hassle-free way to gain exposure to gold without physically buying or storing it. If you're wondering what is gold fund, how it functions, and whether it fits your investment strategy, this comprehensive guide is for you.
Gold Fund Meaning & How It Works
A gold fund is a type of mutual fund that primarily invests in gold Exchange-Traded Funds (ETFs). Instead of buying physical gold, investors can gain exposure to the metal in a digital, dematerialized form. For those wondering what a gold mutual fund is, it's essentially a fund-of-funds that derives its value from the performance of gold or gold-related assets. etc.
Purpose of Gold Funds in a Diversified Portfolio
Gold funds act as a hedge against inflation and offer portfolio diversification. In times of economic uncertainty or market volatility, gold tends to retain or increase in value. By including a gold fund in your mutual fund’s portfolio diversification strategy, you reduce the overall risk while maintaining potential returns.
How Do Gold Mutual Funds Work?
Gold mutual funds collect money from investors and invest primarily in gold ETFs. These ETFs, in turn, track the price of gold. Hence, the performance of a gold mutual fund is linked directly to the price movements of gold. If you’re looking at how gold mutual funds work, remember that while returns are not fixed, they usually mirror gold price trends.
Key Features of Gold Funds
Here are some noteworthy features:
- Low minimum investment: Start with as little as Rs.100.
- Professional management: Managed by experts who understand market dynamics.
- High liquidity: You can redeem units at any time at prevailing NAV.
- No demat account required: Unlike gold ETFs, which need a trading account, gold funds are more beginner-friendly. If you're unsure which to choose, here’s a detailed comparison of gold ETF vs gold mutual fund to help you decide.
Benefits of Investing in Gold Funds
- No storage worries as the gold is held in paper form.
- SIP option available for disciplined investing.
- Great for long-term wealth creation.
- Lower transaction costs compared to physical gold.
If you’re considering where to begin, you might want to explore the Kotak Gold Fund, which is among the well-known options in India.
Risks & Limitations to Consider
Despite their benefits, gold funds are not free from risks:
- Volatile returns depending on international gold prices.
- Expense ratio may be slightly higher due to fund-of-fund structure.
- No dividend payout as most gold funds follow a growth option.
Taxation of Gold Funds
- Short-term capital gains (if sold within 2 years) are taxed as per the individual’s income tax slab.
- Long-term capital gains (if held beyond 2 years) attract 12.5% tax.
Who Should Invest in Gold Funds?
Gold funds are suitable for:
- Investors seeking inflation protection.
- Those looking for portfolio balancing during market volatility.
- Individuals without access to trading accounts but keen on investing in gold-linked assets.
They can also serve as a safe haven during geopolitical tensions or economic downturns.
How to Invest in Gold Funds
Investing is simple and can be done online or through fund houses. Here’s how:
- Choose a Gold Mutual Fund: Start by selecting a gold mutual fund that aligns with your financial goals and risk profile.
- Decide on SIP or lump sum investment.
- Complete your KYC.
- Monitor performance periodically.
Key Takeaways
- A gold fund is a mutual fund that invests in gold ETFs.
- It’s suitable for investors looking to diversify or hedge against inflation.
- They offer SIP options, ease of access, and tax benefits if held long term.
FAQs
1) What is a gold fund and how does it work?
A gold fund is a mutual fund that invests in gold ETFs or gold-related assets. It works by pooling money from investors and investing in these assets, aiming to track gold price movements.
2) What is gold SIP and how is it different from a lump-sum?
A gold SIP lets you invest a fixed amount regularly in a gold mutual fund. Lump-sum, on the other hand, involves a one-time investment. SIPs offer the benefit of rupee cost averaging.
3) How are gold funds different from gold ETFs?
Gold funds don’t require a demat account and are more suitable for beginners. ETFs offer slightly lower costs but need trading infrastructure.
4) What are the benefits of investing in gold funds?
Benefits include inflation hedge, liquidity, portfolio diversification, and ease of access.
5) Who should consider adding a gold fund to their portfolio?
Conservative investors, new mutual fund investors, and those seeking asset allocation benefits should consider gold funds.
6) How are gains from gold funds taxed in India?
Short-term gains are taxed as per your tax slab. Long-term gains attract 12.5% tax after 2 years.
8) Is there an exit load in gold mutual funds?
Some gold funds charge a small exit load if units are redeemed within a specific period. For example, the Kotak Gold Fund
- If redeemed or switched out on or before completion of 15 days from the date of allotment of units – 1.00%
- If redeemed or switched out after completion of 15 days from the date of allotment of units – NIL
*Investor should check scheme information document for same.
Disclaimers
Kotak Gold Fund
Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.
These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
