Gold Mutual Funds: Definition, Key Features, Benefits and Taxation Rules

Gold Mutual Funds can be defined as a category of mutual fund that primarily makes various gold investments such as physical gold bullion, gold exchange traded funds or equity stocks of gold mining and/or refining companies. As a result, changes in the domestic or international price of gold impacts the performance of the investment.

This make gold funds an ideal hedging investment option whose price has historically featured a negative co-relation to the performance of equity markets. This means that when equity markets witness a slowdown, gold prices have historically increased and aided the preservation of wealth. What’s more, gold prices have a positive correlation to inflation, so historically gold fund investment returns have also kept pace with inflation in the long-term.

The primary investment of Gold Mutual Funds can include gold bullion i.e. physical gold bars or stocks of gold mining/refining companies and even Exchange Traded Funds (ETFs) that invest in physical gold or stocks of gold mining/refining companies. Apart from this, gold funds may also invest a relatively smaller portion of their investible assets in cash, cash-equivalent instruments or debt instruments to help maintain adequate liquidity. This portfolio of assets is managed by a professional fund manager similar to other types of mutual funds and exchange the fund house charges investors a few in the form of an expense ratio.

Gold mutual funds as an investment option in India offers a few unique benefits to investors. Below are some of the key features and benefits of this investment:

Below are some of the key reasons why investors should consider including gold funds in their investment portfolio:

Below are some key steps that you can follow to select a suitable gold mutual fund to invest in:

From a taxation perspective, gold funds are considered as non-equity investments so their tax treatment is similar to debt mutual funds in India. For gold fund units purchased prior to April 1, 2023, short-term capital gains taxation rules were applicable if units were redeemed prior to completion of 3 years, while gains from units redeemed after 3 year were considered as long term gains. As per this rule of tax on mutual funds, the short-term capital gains were taxed as per the income tax slab rate of the investor. The tax rate on long term gains from gold funds was 20% with indexation benefit.

For gold fund units purchased on or after April 1, 2023, only a single tax rate is applicable on both short and long term gains. As per this rule, all gains from redemption of gold funds are taxable as per the income tax slab rate of the investor for the applicable financial year.