Fund category guide
Best precious metal funds in India: gold and silver without the locker
A precious metal fund is almost always a fund of funds: it buys units of a gold or silver ETF, and you buy units of it. You get the metal's domestic price without a demat account, making charges or a locker. What you give up is a layer of cost, and what you must understand before buying is that the metal produces no income — the entire return is the price someone else will pay later.
Key takeaways
- Almost every gold or silver mutual fund in India is a fund of funds that holds the corresponding ETF. You are buying the ETF at one remove.
- The advantage over an ETF is practical: no demat account, no bid-ask spread, SIPs allowed and clean systematic withdrawals.
- The cost is two layers of expense and an extra day of settlement. Expect roughly 0.50-0.80% in total against 0.30-0.50% for holding the ETF directly.
- Tracking difference, not tracking error, is the number to check. A fund consistently a percentage point behind the metal is losing you more than the expense ratio suggests.
- Silver is not a smaller gold. Roughly half of its demand is industrial, which makes it far more volatile and tied to the manufacturing cycle.
- Neither metal pays interest or dividends. The case for holding is diversification and currency protection, not compounding.
What is a precious metal fund?
A precious metal mutual fund in India is structured as a fund of funds. The scheme collects your money and buys units of its own house's gold or silver ETF, which in turn holds physical bullion in a custodian's vault at 99.5% purity for gold and 99.9% for silver. Your NAV therefore tracks the domestic price of the metal, which combines the international price, the rupee-dollar rate and import duty.
The reason this structure exists is access. An ETF needs a demat account and a broker, trades at whatever price the market offers at that moment, and cannot be bought through a monthly SIP in the ordinary way. A fund of funds needs none of that: you transact at NAV, you can start a SIP of ₹500, and you can set up a systematic withdrawal in retirement. For most investors that convenience is worth the extra fee layer, which typically runs 0.10% to 0.40%.
What you should not expect is a return engine. Gold has no earnings, pays no coupon and produces nothing; its long-run rupee return has come largely from currency depreciation and from crises that pushed investors towards it. It works as portfolio insurance because it tends to hold or gain value when equities fall, and because a weakening rupee lifts its local price. That justifies a 5-10% allocation. It does not justify treating it as an alternative to equity.
Choosing between the instruments
Gold and silver can each be bought four or five ways in India, and the differences are mostly about cost, access and tax.
The default precious metal holding: liquid, widely offered, and the one with a genuine record as a portfolio hedge.
Gold ETF fund of funds
No demat needed, SIP-able, transacts at NAV. The practical default for most investors, at roughly 0.50-0.70% all-in.
Most convenientGold ETF directly
Cheaper by 0.10-0.30% if you already have a demat account and can handle the spread on illiquid days.
Lowest costPhysical gold
Making charges of 8-20%, purity risk on resale and storage cost. Fine for jewellery, poor as an investment.
Avoid for investingWhich are the best precious metal funds in India?
Every gold fund tracks the same metal, so the differences are narrow and entirely about execution. Compare the total cost across both layers, the tracking difference against the domestic metal price over three years, the size and liquidity of the underlying ETF, and the exit load window. Do not compare past returns between gold funds as though they reflect skill; they reflect fee drag.
The table below is ranked on three-year returns and refreshed from live scheme data. Judge any fund against the the domestic gold price per 10 grams rather than against the Nifty 50.
| Fund | AUM | 1Y | 3Y | 3Y volatility | Expense |
|---|---|---|---|---|---|
| Axis Silver Fund of Funds Reg Gr | ₹1,281 Cr | 79.11% | 44.50% | 37.43% | 0.65% |
| UTI Silver ETF Fund of Fund Reg Gr | ₹655 Cr | 78.19% | 44.47% | 37.45% | 0.46% |
| Kotak Silver ETF Fund of Fund Reg Growth | ₹1,004 Cr | 80.15% | 44.35% | 37.03% | 0.99% |
| ICICI Prudential Silver ETF FOF Reg Gr | ₹6,514 Cr | 78.03% | 44.27% | 36.97% | 0.99% |
| HDFC Silver ETF Fund of Fund Reg Gr | ₹4,699 Cr | 78.59% | 44.25% | 39.59% | 0.56% |
| ABSL Silver ETF Reg Gr | ₹1,295 Cr | 78.29% | 44.14% | 37.80% | 0.86% |
| Nippon India Silver ETF FOF Reg Gr | ₹4,561 Cr | 79.24% | 44.08% | 43.01% | 1.05% |
| Edelweiss Gold & Slvr ETF FoF Reg Gr | ₹2,951 Cr | 60.39% | 40.42% | 27.09% | 0.56% |
| Category average | — | 55.12% | 39.31% | 27.97% | — |
Returns annualised (CAGR) for periods over one year, as reported for the plan listed. Expense ratios shown are for that plan; the direct plan of the same scheme carries a lower one. Past performance does not indicate future returns.
How do you choose a precious metal fund?
Since every fund tracks the same price, selection comes down to four cost and execution checks — plus one decision about how you hold the allocation at all.
Add up both layers of cost
The expense ratio shown on a fund page is usually the FoF layer only. The underlying ETF charges its own 0.30-0.50%, and both reach your NAV. Compare the combined figure, not the headline one.
Screen: all-in cost under 0.70% for gold
Look at tracking difference over three years
Not tracking error. The question is how far the fund's return has fallen behind the domestic metal price. A gap materially wider than the combined expense ratio points to cash drag or poor execution at the ETF level.
Screen: three-year gap within 0.3% of all-in cost
Check the underlying ETF's size
A fund of funds is only as good as the ETF beneath it. A small, thinly traded ETF prices poorly when the FoF has to buy or sell in size, and that cost is borne by you.
Screen: underlying ETF above ₹1,000 Cr
Decide between FoF, ETF and multi-asset
With a demat account, the ETF is cheaper. Without one, the FoF is the practical answer. If you want gold only as a small slice of a diversified holding, a multi asset allocation fund may deliver it with better tax treatment.
Screen: the cheapest route you will actually use
Confirm the exit load window
Most precious metal funds charge 1% on redemption within 15 to 30 days. This matters if you plan to rebalance tactically rather than annually.
Screen: load window shorter than your rebalancing cycle
Gold FoF vs gold ETF vs physical gold
Three ways to hold the same metal. Sovereign Gold Bonds, which once dominated this comparison, are no longer being issued.
| Attribute | Gold fund of funds | Gold ETF | Physical gold |
|---|---|---|---|
| Demat account | Not required | Required | Not required |
| SIP possible | Yes, from ₹500 | Only via a broker's plan | Informally, via a jeweller scheme |
| Annual cost | 0.50-0.80% across two layers | 0.30-0.50% | Locker charges plus insurance |
| Entry cost | Nil | Brokerage plus bid-ask spread | 8-20% making charges |
| Pricing | End-of-day NAV | Live, may deviate from iNAV | Jeweller's quote |
| Long-term tax | 12.5% after 24 months | 12.5% after 12 months | 12.5% after 24 months |
| Best for | Investors without demat, or running SIPs | Cost-conscious investors with demat | Jewellery, not investment |
What would a gold allocation grow to?
A lump sum projection at a constant rate. Gold's long-run rupee return has been in the region of 9-11% a year, but it arrives in bursts: flat for years, then a sharp move. Use the number for sizing, not for planning.
Worked example: a ₹2,00,000 lump sum held for 10 years at 10% a year is ₹2,00,000 invested. That projects to ₹5,18,748, of which ₹3,18,748 is estimated gains. The figure assumes a constant return; real precious metal returns vary year to year and can be negative, so treat it as arithmetic, not a forecast.
- Amount invested
- ₹2,00,000
- Estimated gains
- ₹3,18,748
- After 12.5% LTCG tax
- ₹4,78,905
Gold does not compound at a steady rate — it has delivered nothing for five-year stretches and doubled in eighteen months. The after-tax line applies 12.5% assuming you hold beyond twenty-four months.
Who should invest in precious metal funds?
- You hold a mostly equity portfolio and want an asset that historically holds up when equities fall.
- You want gold exposure without a demat account, making charges, purity risk or a locker.
- You want to accumulate through a monthly SIP rather than buying in lumps at whatever the price happens to be.
- You have a rebalancing rule and will actually sell gold when it has run and equities have not.
And who should skip it
- You are looking for growth. The metal produces no income, and its long-run real return is close to flat.
- You need the money in under two years. You would pay the short-term rate and take the volatility for no diversification benefit.
- You already have a demat account and buy in large lumps. The ETF gives you the same exposure for less.
What are the risks?
No income, no compounding
Neither metal pays interest or dividends. Every rupee of return depends on the price being higher when you sell, which is a weaker foundation than earnings growth.
Two layers of expense
The FoF fee and the ETF fee both reduce your NAV. Over a decade the combined drag is a meaningful share of a low-return asset's total return.
Rupee dependence cuts both ways
Much of gold's rupee return has come from currency depreciation. A period of rupee strength removes that support even if dollar gold is flat.
Silver's industrial exposure
Around half of silver demand is industrial, so a manufacturing slowdown can pull it down even when gold is rising. It is not a defensive asset in the way gold is.
Tracking difference
Cash held for redemptions, ETF-level costs and FoF trading all mean the fund lags the metal. The gap is usually wider than the stated expense ratio.
Behavioural timing
Inflows into gold funds peak after a sharp rally, which is historically the worst entry point. The asset rewards holding it when it is dull.
How are precious metal funds taxed?
The rules changed twice in two years. What applies now depends on whether you hold the fund of funds or the ETF, and how long you have held it.
Gold or silver FoF, over 24 months
12.5%
Long-term capital gains taxed at 12.5% without indexation, under the rules applying from April 2025.
Gold or silver FoF, under 24 months
Slab rate
Short-term gains are added to your income and taxed at your slab rate.
Gold or silver ETF, over 12 months
12.5%
Held directly, the ETF reaches the long-term rate after twelve months rather than twenty-four.
Applies to resident individual investors for FY 2026-27. The holding period for the long-term rate differs between the fund of funds and the ETF, which is a genuine reason to prefer the ETF if you have a demat account and a two-year horizon. Sovereign Gold Bonds, which were exempt from capital gains at maturity, are no longer issued. Confirm your position with a tax adviser before acting.
Terms you will meet on a precious metal fund factsheet
- Fund of funds
- A scheme that invests in units of another fund rather than in securities directly. Almost every Indian gold fund is one.
- Tracking difference
- How far the fund's return has fallen behind the metal's price over a period. The number that matters for a passive holding.
- iNAV
- The indicative live value of an ETF's holdings. The market price can trade above or below it during the day.
- Domestic gold price
- The international price adjusted for the rupee-dollar rate and import duty. What an Indian gold fund actually tracks.
- Bullion purity
- Gold ETFs hold 99.5% purity bullion and silver ETFs 99.9%, held with an independent custodian.
- Cash drag
- The small cash balance a fund keeps for redemptions, which does not track the metal and slightly reduces returns.
- Gold mining FoF
- A feeder into global mining equity. Moves with the gold price but carries company and country risk on top.
- Rebalancing
- Selling the asset that has outrun its target weight and buying the one that has lagged. How a gold allocation earns its place.
Frequently asked questions
What is a precious metal mutual fund?
A mutual fund that gives you exposure to gold or silver, almost always structured as a fund of funds holding units of the corresponding ETF. The ETF holds physical bullion with a custodian, so your NAV tracks the domestic price of the metal. You need no demat account, and you can invest through a SIP.
Which are the best gold funds in India?
Nippon India Gold Savings Fund, HDFC Gold Fund, SBI Gold Fund, Kotak Gold Fund and Axis Gold Fund all feed their own house's gold ETF and track the same metal price. Because the underlying asset is identical, choose on combined cost across both layers, three-year tracking difference against the domestic gold price, and the size of the underlying ETF.
Gold fund or gold ETF — which is better?
The ETF is cheaper by roughly 0.10-0.30% a year and reaches the long-term tax rate after twelve months rather than twenty-four. The fund of funds needs no demat account, allows SIPs and systematic withdrawals, and transacts at NAV without a bid-ask spread. If you have a demat account and invest in lumps, take the ETF; otherwise the FoF.
How are gold mutual funds taxed in India?
For a gold or silver fund of funds, gains on units held more than twenty-four months are taxed at 12.5% without indexation, under the rules applying from April 2025. Gains on units held less are added to your income at your slab rate. A gold ETF held directly reaches the 12.5% rate after twelve months.
How much gold should I hold in my portfolio?
Five to ten per cent is the range most advisers use. That is enough to cushion an equity drawdown without materially dragging long-run returns, since the metal produces no income. The allocation only does its job if you rebalance, which means selling gold after it has run and equities have not.
Is silver a good investment compared with gold?
They are different assets. Roughly half of silver demand is industrial, from solar panels, electronics and vehicles, so silver tracks the manufacturing cycle as much as investor fear. It typically moves one and a half to two times as much as gold in both directions, which makes it a return-seeking holding rather than a defensive one. Size it smaller.
Can I invest in gold funds through a SIP?
Yes, and this is one of the main advantages of the fund-of-funds structure over the ETF. SIPs typically start at ₹500 or ₹1,000 a month and transact at NAV, so you avoid the bid-ask spread you would pay buying ETF units monthly through a broker.
How much gold does your portfolio actually need?
The answer depends on what the rest of your portfolio holds and how you rebalance it, not on where the gold price has been. Talk to a Dhan Saarthi advisor to size the allocation and set a rule for maintaining it.
Disclaimer
Mutual fund investments are subject to market risk. Read all scheme related documents carefully before investing. Past performance is not indicative of future results, and the value of your investment can go down as well as up.
Precious metal funds track the price of gold or silver, which produces no income and can fall for extended periods. Fund-of-fund structures carry two layers of expense, and the fund's return will lag the metal's price by at least that amount. Silver carries substantial industrial demand risk in addition to price risk. This page is educational content on a fund category, not investment advice.
Dhan Saarthi is a mutual fund distribution platform. Fund selection should reflect your own goals, horizon, tax position and risk tolerance. Consider consulting a SEBI-registered investment adviser before acting on anything here. Scheme names are mentioned for illustration and are not endorsements.
Tax treatment referenced applies to resident individual investors under the rules in force at the date of publication and may change. Returns shown are illustrative placeholders, not live NAV-based figures. Calculator outputs are arithmetic projections based on the assumptions you enter, not guarantees.