How Gold Mutual Fund may help diversify Your Portfolio?

Under the SEBI circular - Categorisation and Rationalisation of Mutual Fund Schemes dated February 26, 2026, Gold Mutual Funds are classified/ grouped in the “Other Schemes” category. Generally, they are structured as Exchange Traded Funds (ETFs) or FoFs (Fund of Funds). Both financial products provide investors with an alternative to holding physical gold. 

How do you make a diversified mutual fund portfolio​? Generally, it is built by adding assets that behave differently under various market circumstances. For investors with significant exposure to equity or debt mutual funds, gold aims to offer an additional layer of diversification.

In India, online gold exposure can be attained through different financial products, such as Gold ETFs, Gold FoFs, and digital gold. Among these, Gold ETFs and Gold FoFs could be relevant for investors holding a mutual fund-oriented portfolio. 

Read this article to first learn what Gold ETFs and Gold FoFs are and then understand how gold exposure may potentially help to create a diversified mutual fund portfolio.

A Gold ETF tracks the domestic price of gold prevailing in the market. As per SEBI regulations, they invest at least 95% of their total assets in gold, including physical gold and permitted gold-related instruments. 

The value of a Gold ETF unit is based on the domestic prices of gold. However, factors such as expenses, tracking error, and market conditions can cause some difference between the ETF’s return and the actual price movement of gold.

Since Gold ETFs are traded on stock exchanges, units can be bought or sold during market hours at prevailing market prices.

A Gold FoF is a mutual fund scheme that invests primarily in the units of a Gold ETF, rather than directly purchasing physical gold. This gives investors exposure to gold prices through a mutual fund structure.

As per SEBI regulations, a Gold FoF invests at least 95% of its total assets in units of the underlying Gold ETF. 

Since the FoF invests in a Gold ETF, its performance is influenced by the price movement of gold as well as the expenses + tracking difference of both the FoF and the underlying ETF. 

Gold is not usually added to a portfolio with the expectation that it will outperform every other asset. Its role is different. Gold mutual funds may provide diversification and may help reduce concentration of portfolio to one asset class.

Thus, , investors may not view gold only as a “commodity investment”. Let’s see four different reasons how a gold ETF or FoF may help a mutual fund portfolio: 

1. Gold and Equities may be “Negatively” Correlated

Usually, gold ETFs and/or FoFs are used to  create a diversified mutual fund portfolio​. Gold has historically shown low correlation with Indian equities and many debt instruments. However, past incidents are not guaranteed and may or may not occur in future.

As per a World Gold Council Report, dated March 17, 2026, based on Bloomberg data, gold has predominantly shown a negative correlation with equities across most periods. (Source: Gold.org). Thus, during periods of market uncertainty, several investors move towards gold, which may potentially help diversify the portfolio when equity prices are under pressure. 

Thus, for an investor with a portfolio concentrated in equity schemes, potentially adding some exposure to gold through a gold mutual fund may diversify portfolio risk. However, this does not mean gold will always rise when equities fall, or that it will eliminate portfolio losses. 

2. Potential Against Inflation

Generally, when inflation rises, the cost of goods and services increases, which reduces the purchasing power of money. Particularly, this can be a concern for investors whose portfolios have a large allocation to fixed-income investments (as the income generated may not rise in proportion to the cost of living). 

Now, gold may help against inflation and may potentially help to preserve purchasing power over the long term. Its market price may increase over time as investors respond to:

• Higher inflation
• Economic uncertainty
• Currency movements, and 
• Changing demand

If gold prices potentially rise during an inflationary period, the gain from gold exposure may partly offset the decline in the real purchasing power of other portfolio holdings.

However, note that gold prices can also decline in the short-term and should not be viewed as a guaranteed protection against inflation or currency depreciation. (Source: Reuters report dated July 17, 2026)

3. An Asset with different characteristic

Gold has a different characteristic from debt investments. Gold itself does not depend on a borrower making a payment. A bond or debt instrument carries credit risk because its value ultimately depends, in part, on the issuer's ability to meet its obligations. Gold has no such issuer or repayment obligation. 

The World Gold Council describes gold market as “highly liquid” . (Source: World Gold Council 2026 report, dated February 4, 2026)

Gold exposure through a Gold ETF or Gold FoF allows an investor to participate in the gold market without directly holding physical gold. Therefore, its role can extend beyond seeking price appreciation. 

4. Gold helps Reduce Dependence on a Single Economic Outcome

A portfolio can become “vulnerable” when most investments depend on the same economic scenarios. Let’s understand how this happens:

These scenarios show that a portfolio highly concentrated around equity or debt can become dependent on particular economic conditions. Since gold has different price drivers (such as global demand, or geopolitical conditions), investing in gold mutual funds may reduce the portfolio’s dependence on any particular economic outcome.

So now you know what gold mutual funds are and how they may potentially support a mutual fund portfolio. If we were to revise, investors may gain exposure to online gold through these primary financial products amongst others in Mutual Fund landscape: Gold ETFs and Gold FoFs. 

A Gold ETF is an exchange-traded scheme that invests at least 95% of its total assets in gold and aims to track domestic gold prices. A Gold FoF, on the other hand, invests at least 95% of its total assets in units of an underlying Gold ETF and provides exposure to domestic gold prices through the mutual fund route.

Adding gold exposure to a mutual fund portfolio may potentially help in:

• Diversification by adding an asset with different return drivers.
• Assists to some extent in Managing portfolio risk during periods of market stress.
• Helps during inflation and rupee depreciation risks over the long term.
• Aims to Reduce dependence on one economic scenario for portfolio performance.
• Adding an alternative asset class alongside equity and debt investments.

Gold, however, does not guarantee returns or protect against losses. Investors may consider gold exposure based on their individual investment preferences, financial objectives, investment horizon, and risk profile.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh . The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. How to invest in a Gold ETF mutual fund?

The units of Gold ETFs are bought and sold on a stock exchange, just like shares. An investor generally needs a demat and trading account to transact in its units. 

Alternatively, another financial product is a Gold FoF, which can be purchased directly through the mutual fund route without a demat account. 

2. Is a Gold ETF better than buying physical gold?

A Gold ETF may offer an alternative to physical gold without concerns related to storage, security, and jewellery-making charges. However, Gold ETFs involve market-related risks, so the choice should depend on the investor's objectives, risk appetite, and preferred investment route.

3. Does investing in a Gold FoF require a demat account?

No, a Gold FoF can be purchased directly from an Asset Management Company (AMV) or through a registered broker without a demat account.

An Investor Education and Awareness Initiative by Tata Mutual Fund . 

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