Gold ETF vs Gold Mutual Fund

Gold ETFs and Gold Mutual Funds both provide exposure to gold but differ in structure, costs, and management. Gold ETFs offer lower expense ratios, higher liquidity, and direct gold investment, while Gold Funds provide professional management and exposure to gold-related industries, enhancing diversification.
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Difference between Gold ETF and Gold Mutual Fund
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3 min
14-Feburary-2025

Gold exchange-traded funds (ETFs) and gold mutual funds are two popular investment options for those seeking exposure to gold. Gold ETFs track the price of physical gold, offering a direct investment in the precious metal. They are passively managed and traded on stock exchanges, providing investors with real-time liquidity. Gold mutual funds, on the other hand, are actively managed funds that invest in gold-related securities, such as gold ETFs, gold mining stocks, and gold derivatives.

In this article, we will delve deeper into the key differences between gold ETFs and gold mutual funds, exploring factors such as investment approach, liquidity, expenses, and tax implications. By understanding these distinctions, investors can make informed decisions about which investment vehicle best aligns with their financial goals and risk tolerance.

What is gold ETF?

Gold ETFs are passively managed investment vehicles designed to track the performance of a gold index. Each unit of a gold ETF represents one gram of 99.5% pure gold. As a hybrid investment option, gold ETFs combine the features of mutual funds and stocks. They are managed like mutual funds but are traded on stock exchanges like stocks. To invest in a gold ETF, investors must possess a Demat account.

What is gold mutual fund?

A Gold Mutual Fund is an open-ended fund that invests primarily in Gold Exchange-Traded Funds (ETFs). This strategy aims to replicate the performance of physical gold, offering investors exposure to gold prices without the complexities of direct gold ownership.

It's crucial to differentiate between Gold Mutual Funds and Thematic Gold Funds. While both may involve gold, their investment approaches and potential returns differ significantly:

  • Gold mutual funds
    • Invest directly in gold ETFs.
    • Performance is primarily driven by fluctuations in gold prices.
  • Thematic gold funds
    • Invest in stocks of companies involved in gold mining, refining, or processing.
    • Performance is influenced by the underlying companies' financial health, market trends, and industry-specific factors.

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Difference between Gold ETF vs Gold funds

The other points of difference between Gold ETF vs Gold funds are as follows:

Method of Investment

An investment in a gold fund is possible through SIP at a minimum amount of Rs. 500 as units of the said gold fund on its existing NAV. ETFs require a minimum purchase of 1 unit, equalling one gram of gold. Hence the minimum amount of investment in an ETF is obviously higher.

Holding

You can sell and purchase gold ETFs through brokers or by way of your Demat account, and such ETFs are debited or credited to the Demat account when you buy. However, there is no such obligation when investing in a gold fund.

Investing Through SIP

An investment can be made through SIP or even lumpsum in any gold mutual fund based on that day’s net asset value.

Transaction Cost

The ETF annual cost is approximately 0.5% to 1% by way of expense ratio, brokerage, and other assorted charges. For a gold mutual fund, the closure price annually is between 0.6% and 1.2%, including ETF and management fees, and the ETF fees. Moreover, gold ETFs do not carry exit costs, whereas redemption of a gold fund in one year carries an exit load of 1% to 2%.

Liquidity

Every ETF is traded on a particular stock exchange. Hence, a plethora of buyers are available when you sell your units. However, the Indian ETF market is small, making a gold ETF less liquid. On the other hand, gold mutual funds have been known to be more liquid relatively as they are purchasable and saleable faster.

Gold mutual funds vs gold ETFs - A comparison table

Gold mutual funds and gold exchange-traded funds (ETFs) are popular investment options for those interested in gold. Despite both being accessible online, they have distinct structures, costs, and investment processes. Understanding these differences can help investors choose the option best suited to their financial goals and convenience.

Feature

Gold mutual funds

Gold ETFs

Underlying Investment

Invest in gold ETFs

Invest in physical gold with 99.5% purity

Account Requirement

No Demat account required; can invest online or through an agent

Requires a Demat and trading account

Minimum Investment

Starts at ₹1,000

Minimum investment equal to the price of one gram of gold

Exit Load

Exit load applies if redeemed within one year

No exit load

Liquidity and Redemption

Redemption only at the end of the trading day; fresh purchases through fund house

Can be traded anytime during market hours on stock exchanges

SIP Availability

Available; investors can use SIP for gradual investment

SIP mode not available

Price Stability

Gold prices are relatively stable, acting as a hedge against inflation

Similar price stability as they track gold prices directly

Investment Recommendation

Ideal for investors who prefer a SIP and do not have a Demat account

Suitable for investors seeking flexibility in buying/selling units during market hours


Gold remains a stable investment, and financial advisors often recommend allocating 10-15% of investments to gold as an inflation hedge. Whether through gold mutual funds or ETFs, the choice depends on individual needs for liquidity, convenience, and investment flexibility.

Features of Gold Mutual Funds

  • Convenience: Invest in gold effortlessly without the complexities of a Demat account.
  • Accessibility: Seamlessly invest in gold through mutual funds – no need for extensive research or physical purchase.
  • Stability: Safeguard your portfolio against economic uncertainties by diversifying into gold funds.
  • Diversification: Achieve investment balance and potential growth by including gold funds in your overall investment strategy.

Features of Gold ETFs

  • Convenience: Gold ETFs are digitally managed, eliminating the hassle of physical gold storage.
  • Accessibility: Trade gold seamlessly with real-time access through stock exchanges.
  • Liquidity: Gold ETFs offer easy access to your investment with convenient cash withdrawals.
  • Cost-effectiveness: Gold ETFs are a budget-friendly option compared to the expenses of owning physical gold.

How are gold ETFs and gold funds similar?

 1. A Secure alternative to physical gold

Gold ETFs and Gold Funds offer a convenient and secure method of investing in gold without the physical risks associated with storage and purity concerns. Both investment vehicles pool investor funds to invest in gold-related securities.

2. Portfolio diversification

Gold ETFs and Gold Funds provide a valuable tool for diversifying investment portfolios beyond traditional equity and debt instruments. Historical trends suggest that gold and equity markets often exhibit an inverse relationship, meaning one tends to rise while the other falls. This diversification can help mitigate portfolio risk. For example, if equity markets underperform, the potential for positive returns in gold funds or ETFs can help stabilize overall portfolio performance.

3. Understanding investment costs

Both Gold ETFs and Gold Funds have a Net Asset Value (NAV) calculated daily, which is influenced by fluctuations in gold prices and the underlying asset values. While gold funds are bought and sold at the NAV of the day, gold ETFs trade on stock exchanges at market prices, which may differ from the NAV.

Advantages of gold ETFs and gold funds

Gold ETFs and gold funds offer a streamlined and efficient way to invest in gold, mitigating the challenges associated with physical gold ownership. Key benefits include:

1. Professional management

Benefit from expert management by seasoned professionals who actively monitor market trends and make informed investment decisions on your behalf.

2. Diversification

Reduce investment risk by diversifying your portfolio across multiple gold assets. This helps mitigate the impact of price fluctuations in any single gold holding.

3. Affordability

Start investing in gold with smaller amounts and gradually increase your exposure as your financial situation permits. The flexibility to buy and sell units at any time aligns with your evolving investment needs.

4. Liquidity and convenience

Enjoy the ease and speed of online trading as gold ETFs and funds are listed on stock exchanges. Their liquid nature enables quick conversion of investments into cash.

Gold funds and ETFs - Performance

Fund Name

Performance (%)

ICICI Pru Gold ETF

28.11

Kotak Gold ETF

28.08

Mirae Asset Gold ETF

28.01

Aditya Birla SL Gold ETF

27.99

LIC MF Gold ETF

27.98

Edelweiss Gold ETF

27.93

UTI Gold ETF

27.91

Nippon India ETF Gold BeES

27.91

DSP Gold ETF

27.85

Axis Gold ETF

27.70

Invesco India Gold ETF

27.65

HDFC Gold ETF

27.62

SBI Gold

27.46

UTI Gold ETF FoF

27.43

ICICI Pru Regular Gold Savings Fund (FOF)

27.42

Quantum Gold Saving Fund

27.42

SBI Gold ETF

27.34

HDFC Gold Fund

27.21

Nippon India Gold Savings Fund

27.13

LIC MF Gold ETF FoF

26.94

Invesco India Gold ETF FoF

26.93

Kotak Gold Fund

26.89

Axis Gold Fund

26.78

Aditya Birla SL Gold Fund

26.65


(Returns as on October 28, 2024)

Who should invest in Gold ETFs?

Gold ETFs offer portfolio diversification, market exposure, and low risk backed by high-purity gold. Dematerialized ETFs reduce storage and tax burdens. They provide potential returns and may offer physical gold conversion options. Real-time price tracking facilitates effective asset monitoring. However, not all ETFs allow physical gold redemption.

Who Should Invest in a Gold Funds?

Consider gold funds if you want to shield your investments from inflation, secure your cash, or invest in gold without physical ownership. Small investors can benefit from SIP investing to avoid market timing risks. Gold funds are accessible without a Demat account, but may have slightly higher fees.

Which is better gold ETF or gold mutual fund?

Gold ETFs and mutual funds share similarities in security and diversification. However, mutual funds are Demat-free and allow SIPs, while ETFs offer high liquidity and the option to convert to physical gold. Your choice depends on your investment style and whether you prefer regular or lump-sum investments.

Conclusion

When studying Gold ETFs vs Gold Mutual Funds, it may be concluded that both ETFs and gold funds are viable options for investment. Gold funds are viable for SIPs over longer periods. Conversely, for Demat account holders who need to convert their holdings into physical gold, gold ETFs are a better choice.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

Systematic Investment Plan Calculator

Step Up SIP Calculator

SBI SIP Calculator

HDFC SIP Calculator

Axis Bank SIP Calculator

ICICI SIP Calculator

Nippon India SIP Calculator

ABSL SIP Calculator

Groww SIP Calculator

LIC SIP Calculator

Frequently asked questions

Why choose an ETF over a mutual fund?
One can choose an ETF over a mutual fund due to low expense ratios and operating costs, higher tax efficiency, facilities for intraday trading that enable investors to purchase and sell their shares at real-time market prices, greater transparency and visibility, access to a more diversified security portfolio, and higher flexibility when it comes to trading options and investment size, and the benefits of specialised strategies adopted by ETFs.

Is buying a gold ETF a good idea?
Generally speaking, a gold ETF investment is viable for those investors who aim at diversifying their portfolios, take advantage of rising gold prices and hedge against rising inflation, without owning any gold physically.

What are the risks of investing in gold ETF?
A Gold ETF is always subject to price volatility, does not generate any cash income, has a counterparty risk associated with the custodian and ETF issuer, and is unsuitable for those having a lower risk tolerance and short investment plans.

What is safer ETF or mutual fund?
Both mutual funds and ETFs are safe options for investment. However, the safety level is governed by several factors such as the specific investment objectives of the fund, management style, and holdings.

Is a gold ETF a superior investment to a gold mutual fund?

Gold ETFs generally exhibit lower expense ratios compared to gold mutual funds. This cost efficiency stems from their passive management approach. Conversely, gold mutual funds, due to their active management strategies, may incur higher expense ratios. Gold ETFs offer enhanced transparency as they directly track the underlying gold price.

What are the potential drawbacks of gold ETFs?

Gold ETFs are subject to certain risks, including counterparty risk, annual fees, and the possibility of tracking error, where the fund's performance may deviate from the gold price. Additionally, investors should note that they do not physically own the gold.

Are capital gains from gold ETFs tax-free?
  • New tax regime: For Gold ETF units acquired between April 1, 2023, and March 31, 2025, capital gains realized within a 12-month holding period will be taxed at the applicable income tax slab rate, irrespective of the investment tenure.
Which gold ETF is the most favorable choice?

Among the 24 funds analyzed, ICICI Prudential Gold ETF has demonstrated the highest return of approximately 28.11% since November 2023, followed by Kotak Gold ETF, which yielded a return of 28.08% during the same period

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