Gold ETFs vs gold mutual funds: Key differences in returns, costs, taxation and SIPs

Investors often confuse gold ETFs with gold mutual funds and may end up choosing the wrong investment option. While both fall under the mutual fund category regulated by AMFI, they differ significantly in terms of investment structure, taxation, costs, liquidity, and investment approach.

So, let’s explore the key differences between the gold ETF and gold mutual funds.

What are gold ETFs and gold mutual funds?

Gold ETFs are exchange-traded securities that track the price of gold in the domestic market. Gold ETFs directly hold physical gold of high purity or invest in gold-linked instruments such as Exchange Traded Commodity Derivatives (ETCDs). These ETFs can be easily bought or sold like a share on the stock exchange.

Gold mutual funds, on the other hand, are mutual fund schemes that primarily invest in units of the gold ETFs. Some thematic gold funds may also allocate money to companies involved in gold mining, refining, or related businesses. Gold funds are also known as Gold Fund of Funds (FoFs).

This means that gold ETFs buy physical gold and related instruments while gold mutual funds buy units of gold ETFs.

Comparison of gold ETFs and gold mutual funds by 5-year returns and expense ratio

Gold ETFs give better returns than gold mutual funds because track gold prices more closely and have a lower expense ratio. Gold ETFs usually do not charge an exit load but you may have to pay brokerage charges like you do for stock transactions.

While you may not need a demat account to invest in gold mutual funds, they generally have a slightly higher expense ratios and also may levy exit load in the short term. Since these funds do not invest in gold directly, they may not track gold prices as closely.

Taxation of gold ETFs and gold mutual funds

Gold ETFs and gold mutual funds have similar structure in terms of taxation, however the holding period is the only difference.

Capital gains from gold ETFs sold within 12 months are treated as short-term capital gains and taxed according to the investor’s income tax slab. Long-term capital gains from gold ETFs held for more than 12 months are taxed at a flat rate of 12.5%.

On the other hand, gold mutual funds have a longer holding period requirement for taxation. Capital gains earned within 24 months are treated as STCG and taxed as per the investor’s slab rate, while long-term capital gains after 24 months are taxed at 12.5%.

Difference between gold ETF and gold mutual funds

Here are the key differences between gold ETFs and gold mutual funds you should consider:

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.