Gold ETF vs Gold mutual fund: Which is the right investment option?

Gold ETF vs gold mutual fund: There's only one right choice!

There are multiple ways of investing in this asset. But one of them is the smartest way

Gold ETF vs Gold mutual fund: Which is the right investment option? AI-generated image

Summary: Gold ETFs or gold mutual funds, which is the right way to invest in the yellow metal? We break down their advantages, disadvantages and key differences to help decide which option is right for you.

Gold has carved a special place in the hearts of conservative investors. During the tough market conditions of the 2008 Global Financial Crisis, it fell much lower than equity and debt. Now, in this difficult market phase, this precious metal has proven its mettle once again.

As of November 2024, it gunned out over 24 per cent. This unexpected rise has certain key drivers. One of these is that central banks all over the world are stockpiling the yellow metal at a quick pace. Simply because it acts as an excellent store of value amid the fluctuations of fiat currency.

As a result, it has found renewed confidence among Indian investors. That's why we'll discuss the two routes for investing in this asset class: gold ETF and gold mutual fund. We'll run you through the basics of both investment types and how they are different. By the end, you'll have a clear idea of which one suits you best.

Now, let's get started with the first one: gold ETF.

What is a gold ETF?

A gold exchange-traded fund (ETF) is a type of investment fund that directly tracks the price of physical gold. Each of its units represents one gram of gold bullion with 99.5 per cent purity.

Since it is an ETF, it will trade on the stock exchange. So you'll need a demat account to invest in them. However, unlike most ETFs, there isn't a significant premium or discount to them as they can be created or cancelled.

Suggested read: What is a gold ETF?

Benefits of gold ETFs

Lower expense ratio
While gold ETFs vs gold mutual funds both invest in the same asset class, the reality is different. Gold mutual funds invest in one or multiple ETFs. As a result, the expense ratio of a gold mutual fund includes its own expense ratio as well as that of its underlying ETF.
Tax efficiency
When it comes to taxation, the definition of a long-term investment differs for gold ETFs and gold mutual funds. For gold ETFs, an investment is considered long-term if held for over one year. However, for gold mutual funds, the holding period must exceed two years to qualify as a long-term investment.

This shorter waiting period makes gold ETFs a more tax-efficient option for long-term investors. In both cases, long-term capital gains are taxed at 12.5 per cent, but it's important to note that the tax is applied only to the gains, not the entire investment amount.

What is a gold mutual fund?

Gold mutual funds are open-ended investment schemes that primarily invest in one or multiple gold ETFs. Unlike the ETF variant, they do not require a demat account and can be purchased directly through fund houses or brokers.

Benefits of gold mutual funds

Automate investments
Gold mutual funds offer the convenience of systematic investment plans (SIPs), allowing investors to contribute fixed amounts regularly. This approach helps inculcate financial discipline and reduces the impact of market volatility through rupee cost averaging.
Lower capital requirement
Unlike ETFs, where you have to buy an entire unit, you can start in a gold mutual fund with any amount.

Differences between a gold ETF and a gold mutual fund

Let's take a look at how these two investment routes differ. This way, you'll get a better understanding of which is the right investment route for you.

	Gold ETF	Gold mutual fund
Definition	Tracks physical gold prices directly.	Invests in one or multiple gold ETFs.
Demat account	Required.	Not required.
Mode of investment	Lump-sum purchases on stock exchanges. This means you have to buy an entire unit, much like a share.	Allows SIPs and lump-sum investments.
Expense ratio	It is much lower than a gold mutual fund.	The expense ratio of the underlying ETF gets added up as well.
Tax efficiency	Long-term capital gains tax applicable after a holding period of a year.	Long-term capital gains tax applicable after a holding period of two years.
Liquidity	Can be traded during market hours. But the liquidity depends from ETF to ETF.	Redemption is slower as the fund house has to release your money.
Professional management	It is passively managed.	It is passively managed.
Minimum investment	Depends on the unit price of the ETF.	Smaller amounts are possible with SIPs.

Which is the right investment choice?

The question of choosing between a gold ETF and a gold mutual fund eludes many investors. After all, it can be tricky to choose between these two as they look and sound quite similar. So let us help you make the right choice.

Gold mutual funds allow you to start an SIP and begin with a small amount of money. But this convenience comes at a cost. You pay a higher expense ratio because you are paying up both the fund's expenses and the underlying ETF expenses. Hence, with gold ETFs, you get to retain more of your returns.

On another front, ETFs win because the holding period for qualifying for long-term capital gains tax is much lower. This makes it a more tax-friendly option.

If you are looking for mutual funds to start your investment journey, Value Research Fund Advisor offers in-depth guidance. Through our platform, you'll get expert recommendations that help you take care of your gold investments with ease. Also, you get insights to manage your portfolio efficiently.

Building wealth through mutual funds has never been simpler.

This article was originally published on January 17, 2025.

Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.

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