Up 29% in 5 months! Should you invest or avoid gold mutual funds?

Fri June 20 2025

Gold based funds and ETFs together have offered an average return of 29.11% in the current calendar year so far. There were around 32 funds including both gold funds and gold ETFs in the said time period.

LIC MF Gold ETF FoF offered the highest return of around 30.14% in the current calendar year so far, followed by UTI Gold ETF which gave 29.75% return in the same period.SBI Gold ETF gave 29.37% return in the same period. Zerodha Gold ETF delivered a return of 29.28% in the said time period.

Invesco India Gold ETF FoF and Groww Gold ETF FOF gave 28.34% and 28.14% returns respectively in the current calendar year so far.

Experts attribute this surge to a combination of global economic and geopolitical factors such as geopolitical uncertainty and central bank buying.

“Gold prices have rallied in recent times due to a combination of global economic and geopolitical factors such as rising tensions globally, such as conflicts in the Middle East, and Trump tariffs, have increased demand for gold as a safe-haven asset and several countries, including China and India, have been aggressively adding gold to their reserves to diversify away from the US dollar and enhance financial security,” Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth Limited shared with ETMutualFunds.

The expert further shared country wise gold purchases over the years and mentioned that with India seeing a huge jump to 72.6 tonnes of gold in 2024, the highest annual purchase in this three-year period and a 347% increase from 2023 and this sharp rise indicates a strategic focus on gold as a reserve asset, aligning with global trends of de-dollarization and building resilience due to the geopolitical and economic uncertainties.

Echoing a similar opinion, another expert mentions that fresh investments should be made cautiously. “Gold has rallied due to rising global geopolitical tensions and increased central bank buying early in the year. While it has given strong YTD returns, fresh investments should be made cautiously, as much of the rally may already be priced in,” Shruti Jain, Chief Strategy Officer, Arihant Capital Markets told ETMutuaFunds.

Quant Mutual Fund, in a recent note, highlighted that gold may be due for a short-term correction of 12-15% in dollar terms over the next two months. The fund house cautioned investors that the metal may have "peaked out" in the short term, noting that while gold prices have surged recently, the momentum could slow down, and a retracement in prices could be on the horizon.

While commenting on whether one should increase their gold investment or wait for further correction, Jain advises that after this steep run-up, it’s better to wait for a dip before adding more and gold should ideally make up 3–5% of the total portfolio as a diversification and risk-hedging tool.

On the other hand, Shweta Rajani suggests investors to maintain a balanced portfolio, with an asset allocation of 80:20 in equity to debt but if one wants exposure to gold, it should not exceed 5-10% of their portfolio.

“Gold should be treated as a defence asset, with maximum exposure at 20%. Combined allocation to gold and debt should not exceed 20% of the overall portfolio to maintain growth potential,” she added.

Amid safe-haven buying triggered by Israel-Iran tensions and weakness in the dollar index, gold August futures contracts on the MCX opened sharply higher by Rs 2,011 or 2.04%, crossing the Rs 1 lakh mark to trade at Rs 1,00,403 per 10 grams on last Friday, according to a report by ETMarkets

By attributing the recent gold rally to mainly driven by demand and supply, not underlying fundamental metrics, the expert from Anand Rathi Wealth mentions that investing in Gold through SIP is not the best option for investors. They would generate a better return investing in equity mutual funds.

She further shared that if an investor does an SIP in Gold ETFs and another investor does an SIP in 5 diversified equity mutual funds, the XIRR return for gold is 12.53%, whereas for an equity mutual fund portfolio, it is almost 15%.

Sharing a different opinion, Jain mentions that the rally is largely driven by geopolitical tensions and global factors, including safe-haven demand and foreign central bank purchases and having gold in your portfolio is always a good idea because it adds diversification and additionally it’s also a good idea to invest via SIP to spread out your entry and manage risk.

In the last one year, gold based funds have offered up to 38.16% returns with an average return of around 37.16%. Tata Gold ETF offered the highest return of around 38.16% in the last one year, followed by UTI Gold ETF which gave 38.09% return in the same period.

Zerodha Gold ETF offered a 37.69% return in the last one year. Invesco India Gold ETF FoF gave the lowest return of around 35.61% in the last one year period.

Post looking at the last one year performance and current rally, Jain shared that Gold may face some pressure if geopolitical tensions subside and also there is news on selling by China. “Expect it to trade in a range, and avoid aggressive buying at current highs,” she adds.

“Gold ETF holdings have declined in May 2025 to 930 tonnes compared to April 2025. However, the expectation is that the investors will continue to invest in yellow metal for portfolio diversification,” according to commodity communique by Tata Mutual Fund.

After analysing the different probabilities of CAGR of Nifty vs. Gold over different time frames, Shweta Rajani firmly says that Gold’s ability to deliver high long-term returns significantly declines over time and the chance of earning over 12% CAGR from gold is just 0.58% over 10 years and drops to 0% over 15 years and despite similar volatility to equity, its long-term upside is limited, making it less rewarding on a risk-adjusted basis.

“When considering long-term wealth creation, Nifty maintains a much stronger probability of beating inflation and compounding wealth versus Gold, which have a higher standard deviation and lower risk adjusted return potential. As mentioned, gold is a defence asset like debt. Hence, the total allocation to gold and debt in your portfolio should not exceed 20%,” Shweta Rajani said.

Gold is considered a hedge against inflation and with global economic conditions remaining uncertain, gold is expected to retain its appeal as a hedge against market instability.

Gold ETFs are exchange-traded funds that track the price of physical gold. Each unit of a Gold ETF is backed by a specific quantity of gold, usually equivalent to one gram. They are listed on stock exchanges, and you need a demat and trading account to buy and sell them.

Source: https://economictimes.indiatimes.com