Gold has always been considered a safe haven for investors, especially during times of economic uncertainty. Whether it's a global financial crisis or inflation spikes, gold tends to maintain its value. However, when it comes to investing in gold today, you’re no longer limited to buying physical gold.
Two popular modern options are Gold Mutual Funds and Gold Exchange-Traded Funds. Though both offer exposure to gold, they operate quite differently. In this detailed guide, we'll break down the difference between Gold Mutual Funds and Gold ETFs, discuss their pros and cons, and help you choose the right option for your financial portfolio.
Let's dive right in!
What are Gold Mutual Funds?
Gold Mutual Funds are investment schemes offered by mutual fund houses that invest primarily in Gold ETFs or gold-related assets. Essentially, they don't invest directly in physical gold, but rather into funds or companies that track the price of gold.
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Structure: Managed by professional fund managers.
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Underlying Asset: Gold ETFs or gold mining companies.
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Investment Method: Can be bought directly through a mutual fund distributor or online platforms without needing a demat account.
What are Gold ETFs?
Gold ETFs are a type of exchange-traded fund that represents physical gold in dematerialized form. Each unit of a Gold ETF usually represents 1 gram of gold.
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Structure: Traded on stock exchanges like NSE and BSE.
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Underlying Asset: Physical gold (99.5% purity or higher).
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Investment Method: Requires a demat account and trading account.
Key Differences Between Gold Mutual Funds and Gold ETFs
|
Feature |
Gold Mutual Funds |
Gold ETFs |
|
Investment Mode |
Invest in Gold ETFs or gold mining stocks |
Directly invest in physical gold |
|
Account Requirement |
No Demat account needed |
Demat account required |
|
Liquidity |
Redeemable only through fund house (NAV-based) |
Can be bought/sold instantly on stock exchange. Making it highly liquid asset |
|
Expense Ratio |
Higher (1-1.5%) |
Lower (0.5-1%) |
|
Price Transparency |
Priced at day-end NAV |
Priced throughout the day |
|
Minimum Investment |
As low as ₹100 |
Based on market price of 1 unit (~₹5000) |
|
Taxation |
Debt mutual fund taxation |
Same as physical gold (capital gains tax) |
|
Suitability |
For non-Demat account holders |
For tech-savvy, active investors |
Examples to Understand the Difference
Example 1:
Suppose you invest ₹50,000 in a Gold Mutual Fund.
- The fund invests 95% in Gold ETFs and 5% in cash or equivalents.
- You don't need a demat account; you can invest through SIPs or lump sum easily.
- After 1 year, if gold prices increase by 10%, your fund NAV will also reflect this appreciation minus the fund’s expense ratio (~1%).
Example 2:
Alternatively, you invest ₹50,000 directly into a Gold ETF.
- You need a demat and trading account.
- You buy units during market hours at real-time prices.
- When gold prices rise by 10%, your investment value also rises almost parallelly minus a much lower expense ratio (~0.5%).
Cost Comparison
Gold Mutual Funds Costs:
- Expense Ratio: 1-1.5% annually
- Fund Management Charges
Gold ETFs Costs:
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Expense Ratio: 0.5-1% annually
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Brokerage Charges (~0.1%-0.5% per transaction)
👉 According to AMFI India, Gold ETFs had an average expense ratio of 0.75% in 2024, whereas Gold Mutual Funds averaged around 1.3%.
Taxation: Gold Mutual Funds vs. Gold ETFs
|
Particulars |
Gold Mutual Funds |
Gold ETFs |
|
Short Term Capital Gains (STCG) |
Taxed as per individual’s income slab (holding period < 3 years) |
Same |
|
Long Term Capital Gains (LTCG) |
20% with indexation benefit (holding > 3 years) |
Same |
|
TDS |
No TDS |
No TDS |
Important Note: Since Gold Mutual Funds are categorized as non-equity funds, they are taxed like debt instruments.
Performance: How Have They Fared?
According to Value Research, over the past 5 years (as of April 2025):
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Gold ETFs gave an annualized return of around 11.8%.
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Gold Mutual Funds gave an annualized return of approximately 10.5%-11%, after adjusting for slightly higher expenses.
Thus, while both track gold prices, Gold ETFs slightly outperform in net returns due to lower costs.
Which One Should You Choose?
Choose Gold Mutual Funds if:
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You don't have a demat account.
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You prefer SIP investing.
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You want the ease of investing through a mutual fund app or distributor.
Choose Gold ETFs if:
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You already have a demat account.
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You prefer lower cost and direct trading.
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You want flexibility in buying/selling throughout the trading day.
Real-World Scenario: A Practical Comparison
Scenario:
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You invest ₹1,00,000 in both Gold Mutual Fund and Gold ETF.
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Gold price appreciates by 15% over the year.
Gold Mutual Fund:
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Gross Value = ₹1,15,000
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Expense deducted (1.3%) ≈ ₹1,13,505
Gold ETF:
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Gross Value = ₹1,15,000
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Expense deducted (0.75%) ≈ ₹1,14,137
👉 Clearly, Gold ETFs leave you with a slightly higher net gain.
Advantages and Disadvantages
Advantages of Gold Mutual Funds
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No need for demat account
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Easy SIP option
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Professional fund management
Disadvantages of Gold Mutual Funds
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Higher expense ratio
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Indirect investment structure
Advantages of Gold ETFs
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Lower costs
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Real-time trading
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Direct exposure to gold prices
Disadvantages of Gold ETFs
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Requires demat and trading account
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Brokerage charges applicable
Conclusion
Both Gold Mutual Funds and Gold ETFs offer investors a way to gain exposure to the price of gold without dealing with the hassle of storing physical gold. Your choice between the two should depend on your financial needs, technical know-how, and whether you already have access to a demat account.
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If you seek simplicity and don't have a demat account, Gold Mutual Funds are perfect investment option for you.
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If you are cost-conscious and comfortable trading through your demat account, Gold ETFs offer a smarter, more efficient route.
In either case, allocating around 5-10% of your total investment portfolio to gold is generally considered a smart way to Diversify and Hedge against Inflation and Volatility.
FAQs
What is a Gold Mutual Fund?
A Gold Mutual Fund is a mutual fund that invests primarily in Gold ETFs or gold-related assets.
Do I need a demat account to invest in Gold Mutual Funds?
No, you can invest in Gold Mutual Funds directly through mutual fund platforms without a demat account.
How much gold does one Gold ETF unit represent?
Typically, one unit of a Gold ETF represents one gram of gold.
Which is cheaper: Gold Mutual Funds or Gold ETFs?
Gold ETFs are generally cheaper due to lower expense ratios compared to Gold Mutual Funds.
Are Gold ETFs taxed like physical gold?
Yes, Gold ETFs attract capital gains tax similar to the taxation rules applicable to physical gold.
Can I do SIP in Gold ETFs?
No, SIPs (Systematic Investment Plans) are not available in Gold ETFs. However, SIPs are available in Gold Mutual Funds.
