The cheapest gold FoF is still costlier than you'd think

Summary: Most investors compare only the headline expense ratio. That’s the mistake. Here’s what you’re really paying for a gold FoF and how it stacks up against ETFs.

How do I calculate the expenses of a Gold ETF versus a Gold FoF? I see the expense ratio used for comparison. SBI Gold FoF shows an expense ratio of 0.1 per cent, which seems much lower than typical ETFs. Please explain how to evaluate and compare them  – Anantha PS

Numbers can be dangerously persuasive. A gold ETF has an average expense ratio of 0.5 per cent. A gold FoF is usually lower at 0.2 per cent. This immediately declares FoF as the cheaper option.

But this is one of those comparisons where the factsheet can be technically correct and still leave you with the wrong conclusion. A gold FoF can display a lower expense ratio and still be costlier than an ETF.

The answer to this lies in knowing how FoFs are structured and how they work.

Why FoFs appear cheaper than they are

Start with how the two products are built.

A gold ETF is straightforward, which holds physical gold and charges an expense ratio, say 0.5 per cent. That is the cost you bear annually, adjusted in the NAV.

A gold FoF is different. It does not hold gold, but usually units of a gold ETF. Think of it as a wrapper with an additional inner layer.

1. The FoF charges its own expense ratio.
2. The ETF it invests in also charges an expense ratio.

Here is the crucial part. The ETF’s cost is already deducted from the ETF’s NAV. When the FoF declares its expense ratio, it often shows only its own layer. The ETF’s cost is embedded underneath.

So when you see a FoF charging 0.10 per cent or 0.20 per cent, that is usually just the wrapper cost, not including the cost of the underlying ETF.

That is why the lowest-looking number can be misleading.

How to calculate the real cost

The simplest way to think about it is this:

Annual cost of a gold FoF = FoF expense ratio + weighted expense ratio of the ETF it holds

So if a FoF has a 0.10 per cent expense ratio and its underlying ETF costs 0.50 per cent, your effective annual cost drag is closer to 0.60 per cent. 

The factsheet number is not wrong. It is just incomplete when used for comparison.

The cheapest FoF vs the cheapest ETF

Quantum Gold Savings Fund, a FoF, has the lowest expense ratio in its category at 0.04 per cent. That looks exceptionally low.

But this FoF invests in the Quantum Gold Fund, the underlying ETF, which charges 0.56 per cent. So the effective annual cost is roughly 0.60 per cent.

Now compare that with the Zerodha Gold ETF, which has an expense ratio of 0.33 per cent, the lowest in the group.

The FoF’s headline number of 0.04 per cent looks dramatically lower than 0.33 per cent. Yet once the underlying ETF’s cost is included, the total expense of the FoF route is evidently higher.

So should this cost-gap decide your choice?

Costs matter. Over long periods, even a 0.20 or 0.30 percentage point difference compounds into a meaningful drag on returns. On cost alone, gold ETFs clearly have the structural advantage. They have a single layer of charges, while FoFs have two.

But investing decisions rarely depend on one factor alone.

A gold FoF can make sense if

• You do not have a demat account.
• You prefer the simplicity of investing through the mutual fund route.
• You want to run SIPs without worrying about exchange liquidity.
• You want transactions at end-of-day NAV instead of market prices (in case of ETFs) that may trade at premiums or discounts.

An ETF may make more sense if

• You already have a demat account.
• You are comfortable placing exchange orders.
• You want the lowest possible structural cost.

The key is to compare correctly.

The bottom line

A gold FoF can show a very low expense ratio because it reflects only its own layer of charges. The higher cost sits inside the ETF it holds.

Add the two, and the picture often changes.

Before choosing between a gold ETF and a gold FoF, always calculate the full annual cost. Do not compare only the headline numbers.

And if you want to know which gold funds, ETFs or FoFs, best suit your portfolio today, Value Research Fund Advisor can help you cut through the numbers and pick the right fit with clarity and confidence.

Explore Fund Advisor today

This article was originally published on February 23, 2026.