Gold ETFs vs Gold Funds: The ‘cheaper’ option may cost investors more, say experts

Gold investing is back in focus after heavy inflows earlier this year, but recent data shows that investor sentiment may be turning more selective. According to the World Gold Council, inflows into gold exchange-traded funds (ETFs) fell sharply by 77% to $565 million last month, down from a record $2.5 billion in January, as a correction in gold prices triggered profit-booking after a strong rally driven by geopolitical tensions and global trade concerns.

Despite the slowdown, total inflows in 2026 have still reached $3.06 billion, pushing total assets under management close to $20 billion, indicating that demand for non-physical gold remains intact. In India, interest has also been supported by SEBI’s new rules allowing equity mutual funds to invest surplus in gold and silver ETFs, widening the role of precious metals in portfolios.

With gold back in the spotlight, many investors are asking a practical question:
Should you invest through gold ETFs or gold mutual funds (FoFs)?

ETFs look cheaper — but the real cost…

On paper, gold ETFs appear cheaper because they usually have lower expense ratios, typically in the range of 0.4% to 0.7%, and they track gold prices closely. ETFs are passively managed and trade on stock exchanges like shares, making them attractive for investors who already use demat accounts.

However, experts say the comparison is not as straightforward as it looks.

Gold ETFs vs Gold Funds

According to a detailed Value Research analysis, gold ETFs may look like the obvious winner on paper, but the real cost comparison becomes more complicated once actual investor behaviour is considered. Value Research noted that gold ETFs usually have lower expense ratios, track gold prices closely, and fit easily into a demat-based portfolio, which makes them appear cheaper at first glance.

However, Value Research pointed out that the “low-cost” label often breaks down when investors start investing through SIPs or make multiple transactions over time. In many cases, the total cost of owning gold ETFs can end up higher than investing through gold mutual funds, depending on how the investment is executed.

As per the analysis, a gold ETF is an exchange-traded product that holds physical gold and trades on the NSE or BSE like a stock. Investors pay the ETF’s expense ratio, but they may also incur brokerage, demat charges, taxes, and bid–ask spreads every time they buy or sell.

By contrast, Value Research explained that a gold mutual fund, or gold Fund of Fund (FoF), is a regular open-ended mutual fund that invests in an underlying gold ETF. Investors do not need a demat account, SIPs can start with small amounts, and transactions take place at NAV, which already includes the cost of the underlying ETF and the fund’s own expenses.

Visible cost vs real cost

According to analysis, the visible comparison favours ETFs because they publish lower expense ratios, while gold mutual funds show higher expense ratios due to the layered structure. If an investor buys an ETF once and holds it for many years, the lower annual expense can make ETFs more efficient.

But Value Research cautioned that this scenario does not reflect how most retail investors actually invest. With gold ETFs, every purchase becomes a separate trade, brokerage is charged each time, and investors may buy at a premium or sell at a discount to NAV. These costs do not appear in the expense ratio but directly affect returns.

In contrast, Value Research observed that gold mutual funds execute ETF transactions in bulk and allow investors to buy or redeem at NAV without spreads or brokerage. For small and recurring investments, this structure can make FoFs more practical despite the higher stated expense ratio.

Behaviour and convenience

Another key point highlighted in the Value Research report is that operational factors often matter more than headline costs. ETFs require a demat account and market-hour execution, while mutual funds allow SIPs, switches, and redemptions through standard MF platforms.

Value Research noted that because ETFs trade like shares, some investors start timing the market, which increases churn and reduces long-term returns. Mutual fund structures, on the other hand, encourage disciplined investing.

How investors should decide

Instead of asking which product is cheaper, Value Research suggested that investors should look at how they actually invest.

Lump sum investors with demat accounts may find ETFs more efficient

SIP investors often benefit more from gold mutual funds

Small allocations are easier through FoFs

Large tactical allocations may suit ETFs better

Finally, Value Research emphasised that the bigger decision is not ETF vs fund, but how gold fits into the overall portfolio. Gold is meant to act as a diversifier rather than a long-term compounder, so allocation discipline matters more than small differences in expense ratios.

As the Value Research analysis concluded, the label “cheaper” is only meaningful if it holds true after considering real-world investing behaviour.