Investing in Gold: How can investors effectively allocate to gold through mutual funds and ETFs?

The sharp rise of 42.5% in domestic gold prices over the last one year has got many new investors interested in the yellow metal. Exposure to gold can be taken using mutual funds and investors can buy it in small amounts and even add it using SIPs.

HOW CAN INVESTORS MAKE ALLOCATION TO GOLD USING MUTUAL FUNDS? WHAT ARE GOLD ETFs? HOW CAN AN INVESTOR BUY THEM?

Investors can buy gold ETFs, or gold funds, which invest in the yellow metal and give investors exposure to gold price, without having to buy or store physical gold. Gold ETFs typically invest in gold bullion, gold futures contracts, or a combination of both and they aim to track the price of gold as closely as possible. While gold ETFs are traded on the exchange and can be bought like any other stock, those who do not have a demat account can buy gold funds, which invest in gold ETFs. There are multi-asset funds too which typically allocate some portion to gold, but the percentage allocation to the yellow metal differs from one scheme to another.
WHAT IS AN ADVANTAGE OF GOLD FUNDS OVER PHYSICAL GOLD?
Gold funds save you from the worries of storing gold and its associated costs, purity issues and making charges which vary from one seller to another. They give you exposure to gold as an asset class and help you track gold prices at a very low cost.

HOW MANY GOLD ETFs ARE THERE AND HOW MUCH ASSETS DO THEY MANAGE?
There are 21 gold ETFs that manage assets worth Rs 66,664 crore as of July 31, 2025 and have 7,869,000 investor folios.

WHAT HAS BEEN THE RETURN THAT GOLD FUNDS HAVE GIVEN ?
Gold has rewarded investors well over the last decade. In rupee terms, over the last one year, gold funds have returned 42.55%. Over longer tenures of three, five and 10 years, these schemes have returned an average annualised return of 26%, 13.6% and 13.23%, respectively, as per Value Research. However, investors should keep in mind that while past returns from gold have been high they are variable, and there have been times in the past when returns have been negative.
WHAT IS THE EXPENSE RATIO INVESTORS HAVE TO PAY TO BUY GOLD?
Gold ETFs could charge an expense ratio that varies between 30 bps to 80 bps. Gold funds that invest in the ETF charge an additional 3 basis points to 30 bps in the direct plan.

HOW MUCH SHOULD ONE ALLOCATE TO GOLD?
Gold acts as a portfolio diversifier and acts as a hedge against rising inflation. Wealth managers believe investors should allocate 10% to gold in their portfolios. Given the sharp rise in prices in the recent past, those who are low on gold, should stagger purchases, buying on dips or through systematic investment plans (SIPs). Those whose allocation has moved beyond 10%, should not make further investments in equity or debt and also consider booking some profits and reallocating money to other asset class based on their asset allocation and risk profile.