Don’t be Fooled by Lower Expense Ratio of Gold Mutual Funds: You Pay Expense Ratio for Both Gold Mutual Funds and ETFs

When it comes to investing in gold mutual funds or gold exchange-traded funds (ETFs), many investors get attracted by the apparent lower expense ratio mentioned in mutual fund fact sheets. But here’s the truth: if you invest in a gold mutual fund, you are indirectly paying two layers of expenses—one at the mutual fund level and another at the ETF level.

Let’s break this down so you don’t fall into the common misconception.

Understanding Gold Mutual Funds

A gold mutual fund is an open-ended fund that invests primarily in gold ETFs. It allows investors—especially those who don’t have a Demat account—to gain exposure to gold without directly buying an ETF.

• Accessibility: No Demat account required.
• SIPs Available: You can invest via monthly systematic investment plans (SIPs).
• Underlying Investment: The fund invests your money in gold ETFs.

While this looks convenient, it comes with layered costs.

Expense Ratio of Gold ETFs

For investors, a gold exchange-traded fund (ETF) makes direct investments in physical gold. These funds carry an expense ratio, typically ranging between 0.5% – 1% per annum. This cost is deducted from the ETF’s Net Asset Value (NAV) to cover fund management, storage, and trustee charges.

So, if you buy a gold ETF directly, you only pay this single expense ratio.

Expense Ratio of Gold Mutual Funds

Here’s where most investors get confused. A gold mutual fund publishes its own expense ratio, usually between 0.5% – 1.0%, which seems similar to or slightly higher than a gold ETF.

But what’s not clearly highlighted is that this is in addition to the underlying ETF’s expense ratio.

For example:

• Gold ETF Expense Ratio: 0.6%
• Gold Mutual Fund Expense Ratio: 0.8%
• Total Effective Expense Ratio for Investor = 1.4%

This means you are paying for both the mutual fund’s management and the ETF’s expenses.

Why Investors Choose Gold Mutual Funds Despite Higher Cost

Even though gold mutual funds are costlier, they still attract investors for specific reasons:

• No Demat Account Needed: Unlike ETFs, mutual funds can be purchased with a regular bank account.
• SIP Option: Investors can set up SIPs for disciplined gold investing.
• Ease of Use: Simple to buy and redeem via online platforms and fund houses.

So, the convenience premium makes sense for some investors, but it comes at the cost of lower net returns compared to ETFs.

How Costs Impact Long-Term Returns

While an additional 0.5% – 1% in expenses may not sound significant, over 10–15 years, it can erode a large portion of your returns.

For example:

• If you invest ₹5,00,000 in gold mutual funds for 15 years with an annual return of 9%, a 1% extra expense could reduce your corpus by over ₹1,00,000 compared to gold ETFs.

This has a significant impact, particularly as gold is frequently held as a long-term diversifier for portfolios.

Which Option Should You Choose?

• Go for Gold ETFs if:
  • You already have a Demat account.
  • You want to keep costs as low as possible.
  • You are comfortable buying and selling ETFs via stock exchanges.
• Go for Gold Mutual Funds if:
  • You don’t have a Demat account.
  • You prefer SIPs and the convenience of regular mutual fund platforms.
  • You are okay paying slightly higher costs for accessibility.

Conclusion

The expense ratio of gold mutual funds can be misleading if you don’t realize that you’re effectively paying two layers of expenses—the mutual fund’s charges plus the underlying ETF’s expenses. While gold mutual funds offer convenience, investors who want to maximize returns should carefully compare the total cost of ownership before deciding.

If you want the lowest cost exposure to gold, a gold ETF is the smarter choice. But if convenience and SIPs matter more to you, a gold mutual fund could still be a suitable option—just don’t be fooled by the expense ratio printed on the surface.