Gold ETF vs Gold Fund — The Practical Difference

A gold ETF is a scheme whose units trade on the stock exchange, with each unit backed by a quantity of gold held by the fund. You buy and sell units during market hours through a broker, and they sit in your demat account.

A gold fund, sometimes called a gold savings scheme, is an ordinary mutual fund that invests in a gold ETF. You buy and redeem units at NAV in the usual way, with no demat account and no broker involved. It is a fund of funds arrangement, which our page on fund of funds explains.

So the gold fund is one layer further out, holding the ETF that holds the metal.

Four, and together they usually settle the choice.

• Demat account. The ETF needs one; the fund does not. Our post on investing without a demat account covers what that involves.
• Monthly instalments. A gold fund accepts a SIP in the ordinary way. Doing the equivalent with an ETF means placing an order each month.
• Cost. The gold fund carries its own expense on top of the ETF underneath it, so the total is higher.
• Price you get. An ETF trades at whatever the market offers at that moment, which in a thinly traded one can differ from the value of the underlying gold. A gold fund transacts at NAV.

For most households here, the fund is the practical answer.

Somebody without a demat account, or who wants a monthly amount going in without placing orders, gets exactly that with a gold fund and pays a little more for the convenience. That is a reasonable trade.

Somebody who already has a trading account, invests in lump sums rather than monthly, and is buying an ETF that trades actively will pay less through the ETF route. The extra layer is not buying them anything.

The question our page on fund of funds poses applies exactly here: what is the outer layer doing that you could not do yourself? For a household with no demat account, plenty. For one with an account, very little.

Whether you should be adding gold at all, and how much.

Most households in this state already hold gold, often a substantial amount, in a form they will never sell. That is real exposure and it belongs in the calculation before any further buying is considered, which our page on gold versus mutual funds sets out.

Where a financial holding of gold earns its place is as a modest share of a portfolio, held because it does not always move with equity rather than because it is expected to grow. Our page on multi asset allocation funds covers the version where a scheme does that mixing for you.

Family gold bought to keep and hand on is a different matter entirely, and not something we would treat as an investment decision or argue with.

The treatment of gold held through these routes has changed more than once, and the two routes have not always been treated identically.

That means a comparison written a few years ago may be describing rules that no longer apply, and the position for a fund of funds structure specifically is worth confirming rather than assuming, as our page on mutual fund taxation notes.

We are mutual fund distributors and not tax advisers, so anything about your own liability belongs with a chartered accountant. What we would say is that a decision resting mainly on a tax difference is resting on something that can change, which is an argument for choosing on the practical grounds above.

Four questions that come up in almost every conversation on this subject.

Where is the metal. Held by the fund with a custodian, in the arrangement our page on how mutual funds are regulated describes. It is not with the distributor and not with the fund house itself.

Can you take delivery. Generally not in the way people imagine. These are financial holdings, and anybody wanting metal in hand should buy metal.

Purity and making charges. Neither applies, which is a genuine advantage over jewellery where a meaningful share of what you pay is not the metal.

Storage. No locker to rent, nothing to arrange for safekeeping, and no risk of loss at home. For a household holding a significant amount, that is not a small consideration.

Two things worth stating before anybody uses either as something it is not.

Neither is jewellery. You cannot wear it, and for a household whose gold purchases are tied to weddings and festivals, these do not replace that. They sit alongside it.

Neither is a stable holding. The price of gold moves, sometimes a great deal, and money needed within a couple of years does not belong in either. Our page on asset allocation covers where short-dated money goes instead.

We do not sell ETFs or operate broking accounts, and we hold no view on where the gold price is heading. If you want to work out how much gold your household already effectively holds before adding more, get in touch.