Gold holds a special place in our hearts. We buy it during weddings and for special and festive occasions. But while old is gold, there’s a key use of gold in investment strategies. Ask any financial advisor, and you’ll be told to balance risk – that is, to invest in low-risk instruments in order to keep your portfolio stable.
Gold works as an excellent hedge against market risks and inflation. You’ll often find that when the markets aren’t doing too well, gold prices seem to rise, and vice versa. And as a long-term investment, gold makes a great case for itself.
In 2005, the average price of gold in India was ₹7,000 for 10 grams. In 2015, it rose to ₹26,343. In 2026, it is upwards of ₹1,57,400.
Gone are the days of buying gold only as jewellery, bars, or coins. Now you can invest in gold through mutual funds without having to physically possess the item and its associated costs like storage, security, etc.
How to Invest in Gold?
Here is a step by step process.
Step 1: Choose the type of gold mutual fund
There are two types of gold mutual funds:
- Gold Exchange Traded Funds (ETFs)
- Gold Fund of Funds (FoF)
In ETFs, the money you invest in the mutual fund scheme is used to buy physical gold. Whereas in Fund of Funds, the capital is invested in ETFs, which in turn use the capital to buy gold. That’s the major difference in terms of how they function. Considering the extra layer in FoF, it is a little more expensive than an ETF. However, you do not need a demat account for FoF.
If you want price efficiency, choose ETFs. If you want the familiar mutual fund experience, choose a gold FoF.
Step 2: Check for Low Expense Ratio and Tracking Error
The expense ratio, albeit a small percentage, is still a significant cost to factor in while making your investment decision. Expense ratios are clearly disclosed by all fund houses – they are required to by law. The best gold mutual funds tend to have a low expense ratio.
Also, look at the tracking error for ETFs. As ETFs track real-time gold prices, a low tracking error means that the ETF is performing close to its benchmark index, meaning better fund management. The lower the deviation from its chosen index, the better the quality of the fund.
Step 3: Taxation
Both Gold ETFs and Gold FoFs are treated as non-equity funds.
Any gains from ETFs held up to 12 months will be added to your annual income and taxed accordingly. If held for more than 12 months, then the long-term capital gains (LTCG) tax of 12.5% is applied.
For FoFs, the time threshold is increased to 24 months. So, short-term capital gains (STCG) will be applicable if the fund is held up to 24 months, and LTCG of 12.5% if held for more than 24 months.
Make this decision based on how long you wish to stay invested.
Step 4: Allocation
How much should I invest?
Now, a lot of experts suggest limiting gold to 10% of your portfolio. Few venture as far as 15%, not more. Since gold is not a wealth multiplier, its primary use is to hedge against market risks. Think of it as an insurance policy within your portfolio.
Step 5: Monitor and Reallocate
Even though gold is largely a long-term investment, you can’t simply invest and forget about it. If gold rises sharply, reallocate the excess capital. Similarly, if it falls, then add more funds in order to keep it at around 10% of your total portfolio.
Final Thoughts
Investing in gold combines the familiar feeling of tradition with a modern financial structure. It removes the hassles associated with physical gold while still allowing you to invest in it. Gold mutual funds provide an excellent opportunity for diversification, protection against inflation, and stability of the portfolio. Whatever may be the type of gold mutual fund, ensure that the investment is done with discipline and regular monitoring.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
