Gold ETF Vs Gold Mutual Funds - Key Difference Explained

Published on December 15, 2022 | 6 min read

Gold ETF Vs Gold Mutual Funds - Key Difference Explained

Key Takeaways

Gold ETFs (Exchange Traded Funds) are passively managed investment vehicles that track the domestic price of gold, where each unit represents a specific amount of gold in electronic form.
Gold mutual funds are investment vehicles that pool money from many investors and mainly invest in gold-related equities and gold ETFs to generate returns.
Gold ETFs are backed by physical gold, can be bought and sold in lumpsum on stock exchanges during trading hours, and mandatorily require a Demat account. Gold mutual funds primarily hold gold ETF units, offer flexible investment options, and do not require a Demat account.
Gold ETFs allow investors with a demat account to trade units in real-time on stock exchanges, while gold mutual funds are suitable for those seeking a highly flexible model, allowing them to invest in small and fixed amounts regularly.

Gold is considered an inflation hedge and a means of wealth preservation for investors seeking long-term exposure to the asset and steady returns. They can choose between gold ETFs and gold mutual funds, or opt for both.

Let’s understand what gold ETFs and gold mutual funds are and how they work, so you can make informed investment decisions.

What Is a Gold ETF?

Gold ETFs are exchange-traded funds that track the domestic price of physical gold, with each unit representing a specific weight of gold in electronic form. Gold ETFs are backed by high-purity physical gold, and their unit prices generally move in line with the market price of gold.

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Gold ETFs are listed and traded on the stock exchanges, i.e., NSE and BSE, and are stored in the investor’s Demat account, making a Demat account a mandatory requirement for investing in them. To invest in gold ETFs, investors can buy units by making lump-sum purchases during trading hours or opt for a stock SIP option offered by certain brokers such as Upstox.

What Is a Gold Mutual Fund?

Gold mutual funds are investment vehicles that pool money from investors and primarily invest in gold-related assets, such as units of gold ETFs, providing indirect exposure to gold. Gold mutual funds are structured as Funds of Funds (FoFs), offering indirect and affordable exposure to gold ETFs and allowing investors to put in small, fixed amounts regularly through Systematic Investment Plans or SIPs.

The NAV (Net Asset Value) of gold mutual fund units is determined based on the prices of the underlying assets. Investors do not need a Demat account to invest in mutual funds.

Gold ETF vs. Gold Mutual Fund: Key Differences

The following is a comparison table explaining the differences between gold ETFs and gold mutual funds.

Feature	Gold ETF	Gold Mutual Fund
Trade at	Indian stock exchanges such as NSE and BSE.	Directly through the AMC or mutual fund platforms.
Demat Account	Mandatory.	Not mandatory.
SIP Availability	Gold ETFs generally do not offer mutual fund SIPs, but certain brokers offer stock SIPs in gold ETFs.	Investors can start SIPs as low as ₹500 or as per the scheme's minimum investment requirements and start investing in gold mutual funds.
Pricing	Gold ETF unit prices reflect the market price of physical gold and fluctuate during trading hours.	The NAV (Net Asset Value) of gold mutual fund units is determined at the end of the day based on their underlying assets.
Expense Ratio	Varies by scheme. It is generally lower than that of gold mutual funds.	Varies by scheme and is generally higher than that of gold ETFs because the fund may also incur expenses associated with the underlying gold ETF.
Additional Charges	Additional charges such as brokerage fees and Demat account charges may apply.	Investors generally do not incur brokerage or Demat charges, although other applicable fund-related charges may apply.
Liquidity	High flexibility with intraday trading.	Redeemed at the applicable end-of-day NAV through the mutual fund platform.
Taxation	Profit earned by selling gold ETF units held for 12 months or less is taxable at applicable income tax slab rates. Long-term capital gains tax on units held for more than 12 months is generally taxed at 12.5% without indexation.	Profit earned by redeeming gold mutual fund units held for 24 months or less is taxable at applicable income tax slab rates. Long-term capital gains tax on units held for over 24 months is generally taxed at 12.5% without indexation.

Gold ETFs are backed by physical gold of the highest purity, while gold mutual funds are funds of funds that primarily invest in gold ETFs and provide indirect and affordable exposure to gold ETFs.

Gold ETFs require a Demat account and can be traded on stock exchanges during trading hours, while gold mutual funds do not require a Demat account and are ideal for investors preferring to invest a fixed amount regularly as SIPs instead of lumpsum investments.

FAQs

What is the difference between a Gold ETF and a Gold Mutual Fund?

Gold ETFs are traded on the stock exchange and require a demat account, while Gold Mutual Funds are bought and sold through mutual fund platforms without a demat account.

Which investment is better? Gold ETF or Gold Mutual Fund?

Whether gold ETFs or gold mutual funds are better depends on an investor's unique approach. Investors with a demat account and significant lump-sum capital might prefer gold ETFs as they can be traded on the stock exchanges.While those without a demat account who want an affordable, flexible way to gain exposure to gold can opt for gold mutual funds.

Can I invest in a Gold ETF through SIP?

No, gold ETFs do not offer a regular SIP option like mutual funds, but a few stockbroking platforms may offer a stock SIP option.

Are Gold ETF investments taxable in India?

Yes, profits earned from selling Gold ETFs are taxable in India, where the profits from gold ETF units held for 12 months or less are taxed at your income tax slab rates, while profits from units held for more than 12 months are taxed as long-term capital gains at 12.5% without indexation.

Is a demat account mandatory to invest in gold mutual funds?

No, a demat account is not mandatory to invest in gold mutual funds.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.