For generations, Gold has been a prized possession for Indian households. It served as a symbol of culture and wealth. Over the years, the way we invest in gold has evolved.
Instruments such as Gold Mutual Funds and Gold ETFs have been introduced, which let you invest in gold without the hassle of maintaining physical gold.
In this article, let’s break down everything you need to know about these two popular instruments, how they work, what sets them apart, how you can pick one for yourself and how they are taxed.
What Are Gold ETFs?
Gold ETFs, or Gold Exchange-Traded Funds, track the price of Gold. Each unit of a Gold ETF represents some unit (usually 1 gram) of 99.5% pure gold. In 2007, Benchmark Mutual Fund introduced India’s first ever Gold ETF.
Gold ETFs are backed by physical gold. This means that the Asset Management Company (AMC) offering Gold ETFs buys physical gold and stores it in vaults. While investors buy and sell dematerialised forms of Gold via ETFs.
The price of the ETF moves throughout market hours and is a mirror representation of the supply and demand of physical gold. So, if 1 gram of gold is approximately ₹9000, 1 Gold ETF may also be valued accordingly, including some management fees.
This is beneficial for investors since they get to invest in pure gold without having to maintain physical gold. Moreover, the prices are transparent and are also highly liquid. They are traded on stock exchanges like the NSE and the BSE, like any other stock.
What Are Gold Mutual Funds?
Investing in Gold ETFs initially required a demat account, which wasn’t widely adopted or easily accessible in the early days. To simplify gold investing for a broader audience, Gold Mutual Funds were introduced as an alternative that didn’t require a demat account.
Gold Mutual Funds are also known as a Gold Fund of Fund (FoF). These mutual funds do not invest in physical gold instead, they invest in Gold ETFs.
Every day, the Net Asset Value (NAV), which is the per unit price at which Gold mutual funds are bought and sold, are updated at the end of the day, unlike ETFs whose prices fluctuate throughout the day.
Gold Mutual Fund vs Gold ETF: Key Differences
The primary difference between Gold Mutual Fund vs Gold ETF is that while Gold ETFs directly invest in Gold, Gold mutual funds invest in Gold ETFs.
Both these instruments include costs in the form of expense ratios or brokerage. However, with gold mutual funds, since there is an added layer, the expense ratio is slightly higher.
Gold mutual funds are also actively managed funds where the fund manager actively engages in purchasing and redeeming Gold ETFs with the objective of generating the best returns. However, Gold ETFs are passively managed, where they simply track the prices of Gold.
Here’s a summarised view of all the key differences between a gold mutual fund and a gold ETF:
| Point of Difference | Gold Mutual Fund | Gold ETF |
| Investment | Invests in Gold ETFs, which in turn invests in Gold ETFs | Directly invests in physical gold |
| Trading Account | Demat account is not required | Demat account is required |
| Exit Load | May charge an exit load if investments are redeemed within one year | No exit load is levied |
| Redemption | Redeemed at the day’s NAV if sold before the cut-off time (usually 3:30 PM), else the next day’s NAV applies | Bought and sold within market hours at real-time prices on the stock exchange |
| Minimum Amount | Can invest in a lump sum or SIP starting at ₹500 or ₹1000, depending on the fund | Minimum investment is the price of 1 unit of ETF |
| Management | Actively managed fund | Passively managed fund |
| Costs | Higher expense ratio due to dual layers | Includes impact cost and brokerage |
Gold Mutual Fund Or Gold ETF: Which Is Better To Invest?
Now that we’ve covered the structural differences, let’s evaluate how Gold Mutual Funds and Gold ETFs compare in terms of returns, cost, and volatility, three crucial factors that influence your investment decision.
1. Rolling Returns - Rolling returns measure the average annualised return of an investment over a specific time period, calculated on a continuous basis (daily, weekly, monthly), rather than just point-to-point (like 1-year, 3-year, 5-year returns).
2. Cost Incurred - This is the fee fund houses charge to manage your investment. For Gold Mutual Funds, this includes both the fund’s own management fee and the cost of the underlying Gold ETFs, making them slightly more expensive than Gold ETFs.
3. Drawdown - Drawdown measures the maximum fall from a fund’s peak value, helping you assess downside risk. A lower drawdown means your investment is likely to be more stable in turbulent markets.
Let’s start by looking at the top 5 Gold Mutual Funds, ranked by their Assets Under Management (AUM), along with key performance indicators:
| Fund Name | AUM (in ₹ cr) | 5-year Return (%) | Rolling Return (%) | Expense Ratio (%) | Drawdown (%) |
| SBI Gold Regular Growth | 3,582.2 | 13.35 | 13.21 | 0.35 | 20.94 |
| HDFC Gold ETF FoF Growth | 3,557.6 | 13.25 | 13.09 | 0.49 | 21.06 |
| Kotak Gold Fund Growth | 2,834.9 | 13.25 | 13.28 | 0.5 | 20.88 |
| Nippon India Gold Savings Fund | 2,744.5 | 13.15 | 12.94 | 0.35 | 21.54 |
| ICICI Pru Regular Gold Savings | 1,909.0 | 13.25 | 12.95 | 0.39 | 20.67 |
If you had invested ₹10,00,000 in a Gold Mutual Fund delivering an average return of 13.25%, your investment after 5 years would grow to:
- Final Amount = ₹10,00,000 × (1.1325)^5 ≈ ₹18,57,000
- Total Gain = ₹8,57,000
Now let’s take a look at the top 5 Gold ETFs by AUM and their performance metrics:
| ETF Name | AUM (in ₹ cr) | 5-year Return (%) | Rolling Return (%) | Impact Cost (%) | Drawdown (%) |
| Nippon India ETF Gold BeES | 19,782.50 | 14.12 | 12.83 | 0.82 | 21.44 |
| HDFC Gold ETF | 9,025.90 | 14.29 | 13.25 | 0.59 | 21.25 |
| SBI Gold ETF | 7,633.80 | 14.25 | 13.36 | 0.73 | 20.99 |
| ICICI Pru Gold ETF | 7,188.90 | 14.33 | 13.25 | 0.5 | 21.06 |
| Kotak Gold ETF | 7,167.10 | 14.32 | 13.06 | 0.55 | 21.26 |
Note: Impact cost includes bid-ask spread + brokerage commission.
If the average Gold ETF return is around 14.25%, your ₹10,00,000 investment over 5 years would grow to:
- Final Amount = ₹10,00,000 × (1.1425)^5 ≈ ₹19,35,000
- Total Gain = ₹9,35,000
As we can see, Gold ETFs have delivered slightly higher 5-year returns compared to Gold Mutual Funds. This could be attributed to their lower expense ratio and more direct exposure to physical gold.
Gold ETFs, on the other hand, are more cost-efficient. While some ETFs, such as Gold BeES, may have slightly higher costs related to brokerage and impact cost, they typically offer lower overall costs compared to gold mutual funds. This is because Gold ETFs don’t have the additional Fund of Fund (FoF) layer, which adds to the expense ratio in mutual funds.
Both Gold Mutual Funds and Gold ETFs have relatively low drawdowns, but Gold ETFs tend to offer slightly better downside protection. The drawdowns for Gold ETFs range from 20.99% to 21.44%, while Gold Mutual Funds experience slightly higher drawdowns, ranging from 20.67% to 21.54%.
Taxation of Gold Mutual Funds and Gold ETFs
Taxation on Gold Mutual Funds and Gold ETFs is very simple. Here’s how Gold Mutual Funds and Gold ETFs are taxed:
| Investment Type | Holding Period for LTCG | Old Tax Regime (Before April 1, 2025) | New Tax Regime (From April 1, 2025) |
| Gold ETFs | 12 months | 20% with indexation | 12.5% without indexation |
| ≤12 months | Taxed as per income tax slab | Taxed as per income tax slab | |
| Gold MFs | 24 months | 20% with indexation | 12.5% without indexation |
| ≤24 months | Taxed as per income tax slab | Taxed as per income tax slab |
Final Thoughts
Both Gold Mutual Funds and Gold ETFs offer a convenient way of investing in gold without physically maintaining it. The choice between the two depends on your investment preferences and investment setup. In terms of returns and cost-efficiency, Gold ETF have a slight edge due to their direct exposure to gold. Meanwhile, ETFs have shown slightly lower drawdowns as compared to Gold Mutual Funds, but both instruments offer stability. At the end of the day, both are solid options for gold exposure in your portfolio.
Disclaimer:
This blog is for general/educational information purposes and is no way to be considered as advice, or recommendation for investment or otherwise. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Tracking services are not exchange traded product. INDstocks is merely acting as a distributor of Mutual Funds. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948, BSE RA Enlistment No. 6428