Query: I’m trying to decide between investing in a Gold ETF and a Gold Mutual Fund.
For example, if I put Rs. 1 lakh into each, which one will actually give me better returns after accounting for all costs and charges?
Also, why do some experts say Gold Mutual Funds are better, even though ETFs have lower expense ratios?
I want you to explain the conclusion showing clear calculations. A theoretical explanation will not satisfy me.
Answer
For a majority, deciding between investing in Gold ETFs or Gold Mutual Funds might look like the same.
Both let you invest in gold without buying physical bars or coins. But do you know that they work differently? Yes, and those differences affect how much return your investment will make over time.
Both these investment vehicles might look like the same thing, but they are not. Let’s decode them from the eyes of an pro investor.
Let’s walk through what each one is, how picking one over the other can impact your returns.
We’ll expore why experts tend to lean toward one over the other.
1. Whare are Gold ETFs & Gold Mutual Funds
First, let’s talk about what these two options are.
A Gold ETF (Exchange-Traded Fund), is like a stock you can buy on a stock exchange. They buying and selling methods are exactly like you’ll use to buy Reliance’s or TCS’s shares. The Gold ETF directly tracks the price of gold. When gold prices go up, the ETF’s value rises too, and when gold prices drop, so does the ETF.
Popular ETFs in India include Nippon India ETF Gold BeES and HDFC Gold ETF. One can buy them through the online trading account and keep them in a demat account. The process will be just like you would buy shares of a company.
It’s straightforward. It is important to remember here that your money, parked in ETF, is tied directly to the price of gold (minus a small fee).
A Gold Mutual Fund, on the other hand, is a bit more layered. A gold mutual fund is actually a Funds of Funds (FoFs).
Why are they named so?
Because, instead of directly holding gold, they invest your money in a Gold ETF. So, you’re essentially paying for a fund that buys the same ETFs you could buy yourself.
What does it mean, the holdings of a Gold ETF is physical gold. But the holdings of Gold Mutual Fund will be Gold ETF.
Examples of a few gold mutual funds in India are the SBI Gold Fund or the ICICI Prudential Regular Gold Savings Fund. These funds are managed by mutual fund companies. We can invest in them without a demat account (unlike a gold ETF).
Like, for investing in shares, we need an online trading account and a dement account. Similarly, to trading in Gold ETF, a demat account is mandatory. But to invest in Gold Mutual Funds, a SIP route will be enough which does not require a demat account.
2. Which will give higher returns, Gold ETF or Gold Mutual Fund?
If you invest say Rs. 1 lakh in each, which one gives you better returns after all costs?
Since both track gold prices, the raw (gross) return from gold is the same for both.
For example, if gold prices rise by 10% in a year, that’s the starting point for both. But fees and other costs eat into that return. This is where the two start to differ. How?
Let’s learn more about it.
Gold ETF
For a Gold ETF, you pay an annual fee called an expense ratio. The expense ratio of a typical gold ETF will be in between which is usually between 0.4% and 0.6%.
For instance, the Nippon Gold ETF has an expense ratio of around 0.5%, while HDFC’s Godl ETF is closer to 0.51%.
| SL | Gold ETF Name | AUM (Rs Crore) | Expense Ratio (%) |
| 1 | Nippon India ETF Gold BeES | 23,832 | 0.5 |
| 2 | HDFC Gold ETF | 11,379 | 0.51 |
| 3 | SBI Gold ETF | 9,506 | 0.52 |
| 4 | ICICI Prudential Gold ETF | 8,770 | 0.5 |
| 5 | Kotak Gold ETF | 8,315 | 0.55 |
In addition to the expense ratio, while buying and selling an ETF, you also pay the following:
- Total trading cost is about 0.69% which includes the following:
- A small brokerage fee. This will be around 0.01-0.05% per trade.
- GST
- STT, and
- Exchange Transaction Cost
- There will also be a minor demat account fee, which might be Rs. 200 to 500 will also apply (for the sake of simplicity, let’s assume it as zero).
- There are no extra charges like exit fees for selling early.
Considering these costs of ETF transaction, if gold prices grow by say 10% per annum for next five years, what will be the final corpus? I’ll show you the calculation later. Before that, let’s understand the cost structure for gold mutual funds. If you want, you can jump here to see the return comparison.
Gold Mutual Fund
Gold Mutual Funds have fees, too, and this is where things get tricky. So give a special attention here.
Remember the following table before proceeding further:
| Description | Gold ETF | Gold Mutual Fund |
| Portfolio Holding | Physical Gold | Gold ETFs |
When you look at a mutual fund’s expense ratio, it might seem low. In their fact sheet they will declare that their expense ratio is like 0.1% to 0.2% for a direct plan.
That sounds cheaper than an ETF’s 0.5%, right?
But this is where the investors can get confused, thinking that Gold Mutual Funds have a lower expense ratio.
Since the mutual fund invests in a Gold ETF, you’re also paying the ETF’s expense ratio on top of the fund’s own fee. So, the total cost is higher, usually between 0.6% and 1.1%.
| SL | Gold Mutual Fund Name | AUM (Rs Crore) | Fund’s Expense Ratio (%) | Total Expense Ratio (ETF + Fund’s) |
| 1 | SBI Gold Fund (Direct) | 5,221 | 0.1 | 0.5 + 0.10 = 0.60 |
| 2 | HDFC Gold Fund | 4,915 | 0.18 | 0.5 + 0.18 = 0.68 |
| 3 | Kotak Gold Fund | 3,506 | 0.16 | 0.5 + 0.16 = 0.66 |
| 4 | ICICI Prudential Regular Gold Savings Fund | 2,603 | 0.09 | 0.5 + 0.09 = 0.59 |
For example, the SBI Gold Fund’s direct plan will have a total expense ratio of about 0.6%, and ICICI’s is around 0.59% (see the above table).
Some funds also charge an exit load, like 1% if you sell within a year. So this will also add another layer of cost if one sells early.
So let’s try to compute the returns.
Considering these costs of mutual fund transactions, if gold prices grow by say 10% per annum for next five years, what will be the final corpus?
Net Return of Gold ETF and Gold Mutual Fund
| Description | Gold ETF | Gold Mutual Fund |
| Gold Growth Rate (CAGR) | 10% | 10% |
| Initial Investment | 1,00,000 | 1,00,000 |
| Purchase Cost (Brokerage Etc)* | 0.69% | 0% |
| Net Invested Amount | 99,310 | 1,00,000 |
| Expense Ration | 0.50% | 0.65% |
| Net Return | 9.50% | 9.35% |
| Value After 5 years (Before Sale) | 1,56,338 | 1,56,349 |
| Selling Cost (Brokerage Etc)* | 0.69% | 0% |
| Value After 5 years (Rs.) | 1,079 | 0 |
| Final Value | 1,55,259 | 1,56,349 |
* This is what is making the real difference in the final value.
The Gold Mutual Fund yields a slightly higher final corpus (Rs. 1,56,3349) compared to the Gold ETF (Rs. 1,55,259) after 5 years.
What is the reason?
The Gold ETF’s one-time purchase and sale costs (0.69% each) outweigh the slightly lower annual expense ratio (0.5% vs. 0.65% for the mutual fund).
Conclusion
The mutual fund benefits from no transaction costs, making it more cost-effective over the 5 years despite the higher annual expense ratio.
So, now you know why experts often recommend Gold mutual funds even though the expense ratio of gold mutual funds are higher than ETFs.
Moreover, Gold Mutual Funds have their own appeal. You don’t need a demat account in case of mutual funds. They also let you invest small amounts, like Rs. 500 a month, through SIPs, which is great for building a habit.
In ETFs as well you are decide to buy at only one unit to lower your cost of investment. But in this case you cost of transaction will significantly go up (from our assumed 0.69% as shown in the above table). This will further make the ETF investment less cost effective.
The income tax treatment of both ETF and Mutual Funds are the same.
Have a happy investing.
