Your Equity Mutual Fund Can Now Invest in Gold and Silver: What This Means for You

April 30, 2026

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In a circular dated February 26, 2026, SEBI announced that some equity mutual funds can now invest up to 35% of their assets in gold and silver instruments. This new development may improve diversification in some cases to make equity mutual funds more resilient against volatility by using Gold and Silver allocation as a hedge. However, there are nuances to this development. Read on to find out how this development will influence your portfolio.

Understanding Residual Portion

The blanket 35% allocation allowance being touted in the media doesn’t tell the full story.

The official circular states that equity mutual funds can now invest a “residual portion” in Gold and Silver instruments (along with InvITs and money market instruments). So, what is a residual portion?

A mutual fund must meet the requirement of investing a minimum percentage of assets in the core asset class. For example, a large-cap fund must invest 80% of its assets in the stocks of large-cap companies. The residual portion is the leftover percentage of assets after meeting this core asset allocation requirement. So, for large-cap funds, the maximum residual portion would be 20%.

Another important update effective from April 2026 is that physical gold and silver held by mutual funds will now be valued using domestic exchange-polled spot prices instead of the earlier LBMA London benchmark. This may improve valuation transparency and align fund pricing more closely with Indian market conditions.

Gold and Silver Allocation in Equity Mutual Funds

Thus, as per the SEBI circular, equity mutual funds are allowed to use this residual portion to invest in Gold and Silver. Large CAP funds can thus invest 20% of their assets in gold and silver instruments. Mid-cap, small-cap and flexi-cap funds have the maximum allocation room of 35%.

Benefits of This New Development

This new allocation norm makes equity-oriented mutual funds more flexible and resilient. During volatile periods, stocks face immense selling pressure. If a fund invests 100% of its assets in the stocks of its core category, any drop in the value of these stocks affects the entire fund.

However, we have often seen that during volatile times, people flock to safe-haven assets - Gold and Silver. So, their value increases. Equity mutual funds can now use the allowed silver and gold allocation as a hedge against these unexpected or sudden drops in stock prices.

For example, suppose a mid-cap fund invests 65% of its assets in mid-cap stocks and its maximum allowed 35% in gold or silver. Now, if a sudden global event (like a rate hike or geopolitical tension) occurs and the mid-cap index drops by 20%, this drop doesn’t affect the entire value of that mid-cap fund – it only affects the 65% portion. On the other hand, its 35% portion in gold or silver can see an increase in value. This makes the drop less painful.

What Investors Should Watch Closely

While this new flexibility creates fresh opportunities, investors should understand a few important aspects. A higher allocation of up to 35% in gold or silver can help stabilize portfolios during market corrections and periods of uncertainty. However, during strong bull runs in equities, such exposure may moderate overall returns if precious metals underperform stocks.

It is also important to note that this is an option available to fund houses, not a compulsory requirement. Many equity mutual funds may choose not to actively use precious metal allocation and may continue focusing primarily on equities and other permitted instruments.

Over time, this change could gradually blur the distinction between traditional equity funds and multi-asset strategies, as some equity schemes may use gold or silver as a built-in hedge to manage volatility and diversify risk.

In the End – Some Interesting Nuances

The permission to invest 35% of the assets in gold and silver is an option – not a mandate. The same circular allows equity funds to invest in InvITs and money market instruments. So, a fund can completely ignore gold, silver and gold and invest the residual assets in InvITs or money market instruments.

On the other hand, for an investor who is already invested in gold or silver, if the equity fund, she has invested in allocates 35% of its assets to these precious metals, then it creates a portfolio overlap. Investors must now choose equity funds, keeping the gold and silver allocation in mind.

The benefit is genuine: a built-in shock absorber during stock market panic, and that resilience aligns well with the Indian investor's desire for stability. But resilience is not a guarantee of safety. A fund that cushions a fall with its 20% gold allocation is still an equity fund that can fall significantly on the remaining 80%.

Treat this development as a prompt to actively manage your asset allocation, not as a reason to relax and assume your equity fund is now protected. The power is with the fund manager’s choice - your job is to verify that the choice aligns with your own financial plan.

-Suman Dan & Marifur Rahaman

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FILED UNDER: Stock Market

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Your Equity Mutual Fund Can Now Invest in Gold and Silver: What This Means for You

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