For generations, the traditional way of investing in gold was simple: wait for Dhanteras, Akshaya Tritiya, or a wedding, go to the family jeweller, and buy a gold chain or a coin.
But if you look at the actual numbers, physical gold is a poor way to build wealth.
When you buy physical gold, you lose money before you even leave the shop. You pay 10% to 25% extra as “making charges,” plus 3% GST. Then you pay a bank locker fee every year just to keep it safe. If you ever try to sell it back, the jeweller often deducts more for “melting charges.”
With gold prices having risen a lot in recent years, it’s worth treating gold you wear separately from gold you invest in. This guide compares the best gold mutual funds in India, explains exactly how they differ from Gold ETFs, and walks through the tax rules so you don’t lose more than you need to when you eventually sell.
Why Should You Consider a Gold Mutual Fund Instead of a Gold ETF?
For years, the Sovereign Gold Bond (SGB), issued by the RBI, was the most popular way to invest in gold in India. It paid a 2.5% yearly interest rate on top of the gold price, with tax-free returns if held to maturity.
That’s changed. The RBI hasn’t issued a new SGB since February 2024, and there’s no sign of new ones coming. If you already own SGBs from an earlier issue, they’re still valid and keep paying interest until they mature, but there’s currently no way to buy freshly issued ones. For the full picture on this and every other way to invest in gold, see our complete guide: Best Way to Invest in Gold in India.
This is where the Gold Mutual Fund comes in.
How Does a Gold Mutual Fund Actually Work?
When you buy a Gold Mutual Fund, you’re not buying a physical gold bar, and you’re not buying shares in a gold mining company either.
A Gold Mutual Fund is built as a “Fund of Funds.” You give your money to a fund company, like SBI or HDFC. That company uses your money to buy units of a Gold ETF, which itself is backed by real, physical gold sitting in a secure vault.
What Makes Gold Mutual Funds Worth Choosing?
If a Gold Mutual Fund just buys a Gold ETF anyway, why not buy the ETF yourself directly? A few real reasons:
- You don’t need a demat account. To buy a Gold ETF, you need a demat and trading account, like Zerodha or Groww. A Gold Mutual Fund can be bought straight from your bank or a basic mutual fund app, no demat account needed.
- It’s easy to access your money. Unlike the old SGBs, which locked your money away for 8 years, Gold Mutual Funds let you take your money out any working day. You’ll usually see the cash in your account within a couple of days of asking for it.
- You can automate small, regular investments. A single Gold ETF unit currently costs around ₹125 to ₹130 (each unit stands for about 0.01 grams of gold), so buying small amounts isn’t really the problem. The real issue is that most stock brokers don’t let you set up an automatic, repeating monthly purchase for an ETF the way mutual fund apps do for a SIP (Systematic Investment Plan, a fixed amount invested automatically every month). With a Gold Mutual Fund, you can set up a real SIP for as little as ₹100 or ₹500 a month and forget about it.
Gold ETF or Gold Mutual Fund: Which Should You Actually Choose?
Both track the same gold price, but how you buy them, and how they’re taxed, is quite different. For a full comparison of the top Gold ETFs by cost and fund size, see our guide: Best Gold ETFs in India.
| Feature | Gold ETF | Gold Mutual Fund |
|---|---|---|
| Demat account needed? | Yes | No |
| How you buy it | Whole units, around ₹125-130 each | Any amount, including small fractional sums |
| Can you set up an automatic SIP? | Usually not, most brokers don’t support this | Yes, from as little as ₹100 a month |
| Yearly fee | Usually lower, roughly 0.20% to 0.80% | Usually a bit higher, since you’re paying two layers of fees |
| How fast can you sell it? | Instantly, any time markets are open | Once a day, at that day’s closing price |
In short: choose a Gold ETF if you already have a demat account and want the lowest possible fee. Choose a Gold Mutual Fund if you want to “set and forget” a small monthly SIP without needing a demat account at all.
What Are the Best Gold Mutual Funds in India Right Now?
When picking the best gold mutual funds in India, you’re not looking for a manager who’s good at picking stocks, since these funds simply follow the price of gold. What matters more is the fund’s size (bigger usually means safer and easier to buy or sell), how closely it tracks the actual gold price, and how much it charges you each year.
Here are five of the most widely held funds in India right now:
SBI Gold Fund
One of the largest gold mutual funds in India, with close to ₹15,800 crore under management. Its size means strong liquidity and close tracking of the SBI Gold ETF. Good for investors who want an established, well-known fund.
Nippon India Gold Savings Fund
This fund invests in Nippon’s Gold BeES, one of the oldest and most actively traded Gold ETFs in the country. A solid choice if you want a fund with a long track record across several gold market cycles.
ICICI Prudential Regular Gold Savings Fund
Known for being especially accessible to younger or newer investors, with a competitive yearly fee and support for very small SIPs. A good starting point if you’re investing ₹100-500 a month.
HDFC Gold ETF Fund of Fund
With roughly ₹11,200 crore under management, this is one of the largest gold mutual funds after SBI’s. A natural choice if you already invest with HDFC and want your gold holding in the same place.
Kotak Gold Fund
Known for keeping a tight, disciplined structure with low tracking error, meaning its returns stay close to the actual gold price. Good if tracking accuracy matters most to you.
How Are Gold Mutual Funds Taxed?
This is the part most people get wrong, so pay attention here.
Gold ETFs and Gold Mutual Funds track the same gold price, but they’re taxed differently. A Gold ETF is listed on the stock exchange, so it only needs to be held for 12 months to get the lower, long-term tax rate. A Gold Mutual Fund is not listed on the exchange in the same way, so it needs to be held for 24 months, twice as long, to get that same lower rate.
If you sell before 24 months:
This counts as a short-term gain. The entire profit gets added to your income and taxed at your regular income tax rate. If you’re in the 30% tax bracket and sell at, say, 23 months, you’ll lose a large chunk of your profit to tax.
If you sell after 24 months:
This counts as a long-term gain, taxed at a flat 12.5%. There’s no adjustment for inflation on this profit, you simply pay 12.5% on whatever you gained.
The one thing to remember:
If you sell a Gold Mutual Fund anywhere between month 12 and month 24, you’re stuck paying the higher, short-term rate, exactly the period where a Gold ETF would already qualify for the lower rate. If you think you might need to sell within a year or two, a Gold ETF is the more tax-friendly choice.
How Much of Your Money Should You Actually Put in Gold?
Gold carries a lot of emotional weight in India, but it’s worth thinking about it with a clear head as an investor.
Gold doesn’t pay you anything just for holding it, and it doesn’t grow the way a good business does. What it does well is act like a cushion for your overall portfolio. When stock markets fall, or prices rise sharply, or something unexpected happens globally, gold often holds steady or even gains, helping protect the rest of your money.
A commonly used guideline is keeping gold to around 10% to 15% of your total investments, as a stabiliser, not as your main way of growing your money.
A simple next step: open your mutual fund app (Groww, Zerodha Coin, Kuvera, or similar), search for something like the SBI Gold Fund or Nippon India Gold Savings Fund, and set up a small monthly SIP. Let it quietly build your gold holding in the background while your other investments do the heavy lifting.
Frequently Asked Questions
Do I need a demat account to invest in a Gold Mutual Fund?
No. This is the biggest advantage a Gold Mutual Fund has over a Gold ETF. You can buy it directly through your bank or a mutual fund app using regular net banking or UPI, no demat account needed.
What happens to my money if the fund company shuts down?
Your money stays safe. Mutual funds in India are regulated by SEBI, and the actual gold is stored in secure, independently audited vaults. If a fund company closes, your units are usually moved to another company or sold, with the cash returned to your bank account.
Can I get actual gold delivered when I sell my Gold Mutual Fund?
No. You only ever receive cash. When you sell, the fund sells the underlying gold at the current price and pays the equivalent amount into your bank account.
Why do Gold Mutual Funds earn slightly less than Gold ETFs?
Because a Gold Mutual Fund charges its own yearly fee on top of the fee the underlying Gold ETF already charges. This small, extra layer of cost is why returns run a little behind a direct ETF over time.
Can I set up a SIP for a Gold Mutual Fund?
Yes, and it’s one of the best things about this option. You can set up a fully automatic SIP for as little as ₹100 a month.
Are Gold Mutual Funds safer than Sovereign Gold Bonds?
They serve different purposes. If you already hold SGBs from an older issue, they carry a government guarantee and pay extra interest, but your money stays locked in until maturity. Gold Mutual Funds don’t pay interest, but you can sell them any working day. New SGBs aren’t available to buy right now either way.
Do I pay GST when I buy a Gold Mutual Fund?
No. Unlike physical gold jewellery or coins, which come with 3% GST plus making charges, there’s no GST on buying units of a Gold Mutual Fund or Gold ETF.
How is the daily value (NAV) of a Gold Mutual Fund worked out?
It’s calculated once a day, based on the closing price of the Gold ETF units the fund holds, minus that day’s small share of the fund’s yearly fee.
Can I use a loss from a Gold Mutual Fund to reduce my tax elsewhere?
Yes. If you sell at a loss before 24 months, that loss can offset both short-term and long-term gains from other investments. A loss after 24 months can only offset other long-term gains.
Is now a good time to invest in a Gold Mutual Fund?
Gold generally works well as a hedge against inflation and market swings, no one can reliably predict short-term price moves. A steady monthly SIP lets you average your buying price over time instead of trying to guess the right moment to invest a lump sum. For the full picture on every way to invest in gold, see our complete guide: Best Way to Invest in Gold in India.
Disclaimer
This article is for educational purposes only and isn’t financial, investment, or tax advice. Investing in mutual funds carries market risk, and past performance never guarantees future returns. Please do your own research and speak with a SEBI-registered financial advisor before making any major investment decisions.
Last Updated on 1 week ago by Team Paisaseekho
