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Gold ETF vs Gold Fund: Similarities & Differences

As a retail investor, you can invest in gold in various ways. This article will focus on the gold products offered by mutual funds: Gold mutual funds vs. gold ETFs.
Gold Mutual Funds Vs. Gold ETF

There is a lot of demand for gold in India and very little of it is produced in India. Hence, India is one of the world’s largest importers of gold. In 2019, the total annual gold demand was 690.4 tonnes. In 2020, the total annual gold demand was 446 tonnes. The demand in 2020 got dented due to economic uncertainty, job losses, limited supply of logistics, and record-high gold prices

Importance of gold in your investment portfolioBefore we discuss whether you should invest in gold through gold mutual funds or gold ETFs, let us understand why you should invest in gold in the first place. Gold as an asset class has done well in the last 20 years.

As seen in the above chart, in the last 20 years, the price of gold has multiplied almost ten times (935%). In 2001, the price of gold was around Rs. 411/gram. As of 27th August 2021, the price of gold is Rs. 4,273/gram. Thus, gold has delivered a return of 12.42% CAGR in the last 20 years, which is a very good return.

So, as an investment product, gold has given good returns in the last 20 years. Apart from that, as per your asset allocation, you should diversify your investment portfolio into various asset classes such as equity, debt, gold, etc. Gold also acts as a hedge against inflation and also acts as a safe haven during times of uncertainty such as recessions, wars, geopolitical tensions, political instability, etc.
Now that we understand the importance of  investing in gold let us understand whether you should invest in gold through gold ETFs or gold mutual funds.

What are gold ETFs and gold Mutual Funds?

  • Gold ETFs

A gold ETF tracks the price of physical gold in the market. You need a demat account for investing in gold ETF units. When you buy gold ETFs units, they get credited to your demat account. When you sell gold ETF units, they get debited from your demat account.

Gold exchange-traded funds (ETFs) are offered by asset management companies (AMCs). Gold ETFs enable an investor to invest in gold in electronic format. Usually, one gold ETF unit is equivalent to 1 gram of gold. You can buy gold ETFs in two ways:

  1. Directly from the AMC at the time of new fund offering (NFO), or
  2. Post-listing from the secondary market through a stock exchange like NSE

The amount raised by the AMC from the NFO is invested in physical gold against which the gold ETF units are issued to investors. Once the gold ETF units are issued, as an investor, you can hold them for as long as you wish to. You can sell them to some other investor through the stock exchange if you wish to sell them.

For a long-term financial goal like accumulating gold for your daughter’s marriage, you can buy small quantities of Gold ETFs regularly, say every month. Then, before the wedding, you can sell the Gold ETF units. The sale proceeds will be credited to your bank account. You can then purchase gold jewellery with the same proceeds. 

However, to accumulate gold for long-term goals like a daughter’s marriage, you should be disciplined enough to buy gold ETF units from the market every month. The challenge with Gold ETFs is that the systematic investment plan (SIP) option is not available in Gold ETFs. This is where gold mutual funds come into the picture.

  • Gold mutual funds

To address the SIP challenge posed by gold ETFs, asset management companies (AMCs) have come up with gold mutual funds. Gold mutual funds collect money from investors and invest it in the units of gold ETF (managed by the same AMC) on their behalf. The investor is issued equivalent units of the gold mutual fund scheme for their investment.

The purchase and redemption of gold mutual fund units are done through the AMC. There is no demat account requirement for investing in a gold mutual fund. A gold mutual offers a systematic investment plan (SIP) option. You can use the SIP route to accumulate gold for long-term financial goals like a daughter's marriage.

Let us look at the returns given by gold mutual funds in the last three years.

Scheme nameAUM (Rs. crores)1 year2 years3 years
Kotak Gold Fund993-8.61%9.87%16.10%
SBI Gold Fund1,164-8.77%9.79%15.62%
Axis Gold Fund250-8.09%10.28%15.60%
HDFC Gold Fund1,247-9.02%9.86%15.33%
IDBI Gold Fund40.59-8.75%7.73%15.25%


Note: The returns are as of 27th August 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The two and three-year returns are CAGR. The funds have been ranked based on three-year returns.

As seen in the above table, the returns for gold in 2021 are negative. But, this small underperformance has come after the huge 24% returns that gold gave in the previous year (2020).

How are Gold ETFs and Gold Mutual Funds Similar?

  • Investing in a Physical Gold Alternative: Both Gold ETFs and Gold Funds allow you to invest in gold without having to store it or worry about threats or purity issues. Both of these investment alternatives collect money from investors and invest it in gold-related securities.
  • Portfolio Diversification: Gold ETFs and Gold Funds make it simple for investors to diversify their portfolios beyond stocks and bonds. The gold and equity markets, as has been noted in the recent past, frequently follow a see-saw pattern, in which one is low and the other is high, and vice versa. Your portfolio will be adequately hedged as a result of this. When equity markets are down, for example, gold markets normally do well, and vice versa. This helps you keep your portfolio balanced because if your equities mutual funds underperform, the likely greater performance of Gold Mutual Funds/ ETFs can salvage your entire portfolio from underperformance.

Cost Of Each Unit: The Net Asset Value (NAV) of gold ETFs and gold funds is computed at the conclusion of each business day. The NAV is affected by changes in the value of their underlying assets and/or the increase and fall of gold prices. However, unlike gold funds, which are bought and sold according to the NAV of the day, gold ETFs are exchanged on the stock exchange at market price, which may or may not be the same as the NAV of the day

Gold mutual funds vs. Gold ETFs

Before guiding you on whether you should go for gold mutual funds or gold ETFs for your gold investment, let us understand the difference between the two.

FeatureGold mutual fundsGold ETFs
Minimum investmentThe minimum investment amount is usually Rs. 500 or Rs. 1,000. The AMC decides this amount.The minimum investment is the amount required to purchase 1 unit, which is equivalent to the price of 1 gram of gold.
Method of buying and sellingThe purchases and redemption have to be done through the AMC.Post the NFO, the buying and selling are usually done through the stock exchanges.
Deployment of investor moneyInvests in units of a gold ETF managed by the same AMCInvests in physical gold of 99.5% purity
SIP investment modeThe SIP investment mode is availableThe SIP investment mode is not available
Demat account requirementDemat account is not required.Demat account is compulsorily required. Hence, there will be demat account opening charges, brokerage charges for buying and selling ETF units, annual demat charges, etc.
Expense ratioThe expense ratio is slightly higher as compared to gold ETFsThe expense ratio is lower as compared to gold mutual funds.
LiquidityLiquidity is not a problem as units can be bought and sold through the AMC at any time. The transaction happens at the NAV.Liquidity can sometimes be a problem due to a lack of buyers and sellers. The transactions may happen at NAV or premium/discount to NAV.
Exit loadIf the units are redeemed before a specified time (for example, six months or one year), there can be an exit loadThere is no exit load. The investor can sell whenever they want.

Choosing between gold ETFs and gold mutual funds

If you already have a Demat account, and if you are disciplined enough to purchase gold every month on your own, then you can go for gold ETFs. But, if you don’t have a Demat account and would like to go for the SIP route for your gold investments, you can go for gold mutual funds.

Investing in gold mutual funds

The Takeaway

Finally, while both gold funds and ETFs are legitimate investment options, choosing between the two might be a matter of personal preference. Gold funds are a good option if you want to make systematic investments over a lengthy period of time. Gold ETFs, on the other hand, are a good option if you want a Demat account and there's a chance you'll need to convert your gold into physical gold. It's entirely up to you!

The above section has discussed how an investor can choose between gold ETFs and gold mutual funds. With the Glide Invest App, you have the option to invest in gold mutual fund schemes. Based on your risk profile, you will get the recommendations for the best gold mutual fund schemes and other equity and debt mutual fund schemes. You will get advice on how to plan and systematically invest towards your financial goals.. 

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.


Q1: Is Gold ETF considered to be safe? 

A1: One advantage is that gold ETFs are strictly regulated, ensuring that investors' interests are always protected. Apart from that, gold ETFs are tax-efficient due to the long-term capital gain tax and indexation benefits.

Q2: Is a Gold ETF the same as actual gold?

A2: ETFs that invest in gold. ETFs, unlike actual gold, can be bought and sold like stocks on a stock exchange. ETFs allow investors to gain access to gold without the expenses and hassles of markups, storage, and security threats associated with real gold.

Q3: What are the Gold ETF's drawbacks?

A3: When it comes to gold ETFs, there are some circumstances when capital gain tax advantages that apply to ordinary exchange-traded funds do not apply. While investing in gold ETFs, you must consider the cost of a Demat account as well as annual maintenance.

Q4: Is it possible for me to sell the Gold ETF at any time?

A4: Prices for gold ETFs can be seen on the BSE/NSE website and can be purchased or sold at any time through a stockbroker. Gold ETFs, unlike gold jewellery, can be bought and sold at the same price across India.

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