Stock Market · Mutual funds, deeper

Gold mutual funds & ETFs

Gold ETFs and gold mutual funds offer exposure to gold prices without physical storage. They've become increasingly popular as a portfolio diversifier and inflation hedge, and the 2024 tax change handed back the holding-period benefit that the 2023 rules had briefly taken away.

Gold ETFs

• Listed on stock exchange like a stock
• Tracks gold price (1 unit ≈ 1g or 0.01g of gold depending on fund)
• Expense ratio: 0.5-1%
• Buy/sell anytime during market hours

Gold mutual funds (Gold FoF)

• Fund of fund structure. Invests in Gold ETFs
• Bought through MF platforms (no demat needed)
• Slightly higher cost (extra layer of fees)
• Better for SIP investors

Tax treatment

The 2023 rules briefly taxed these like debt funds. Slab rate, however long you held. The 2024 change reversed it. A gold ETF held more than 12 months is long-term now: 12.5% on the gain, no indexation. Sell inside 12 months and the gain is added to your income at your slab rate.

Gold FoFs run one step behind. Their units aren't listed, so the long-term clock is 24 months rather than 12. Same 12.5% once you cross it.

Comparison: Gold ETF vs SGB vs Physical

Sovereign Gold Bond (SGB):

• Pays 2.5% annual interest on top of whatever gold itself does. That interest is taxable at your slab.
• Capital gains are fully tax-free if you hold to the 8-year maturity
• Backed by the Government of India. No fund house, no expense ratio, no tracking error.
• 8-year tenure with an exit option from year 5. You can sell earlier on the exchange, but SGBs trade thinly, often at a discount to fair value, and going out that way forfeits the tax-free treatment.
• Issued in tranches, so you can only buy when the government opens one

Gold ETF:

• No interest income
• Gains past 12 months taxed at 12.5%, no indexation. Inside 12 months, at your slab.
• Expense ratio of 0.5-1% a year, working against you quietly and continuously
• Sell any quantity on any trading day at a price that tracks gold closely
• Available whenever you want it, no waiting for a tranche

Physical gold:

• High making charges (8-25% for jewellery)
• Storage and insurance costs
• Purity verification issues

> These aren't ranked versions of the same product. SGBs pay you to wait and hand you tax-free gains. Provided you can actually wait eight years. Gold ETFs give up both of those in exchange for being sellable on a Tuesday afternoon. Which one fits depends entirely on whether your money is genuinely committed for the full term.

Portfolio allocation

5-10% gold allocation in a diversified portfolio:

• Reduces overall portfolio volatility
• Performs well in equity crashes
• Inflation hedge over long periods

If you're comparing gold ETFs against each other

They're near-identical products tracking the same metal, so the differences are narrow and mechanical:

• Expense ratio, because over a decade almost nothing else will separate them
• Tracking error, how far the fund drifts from the actual gold price
• On-exchange liquidity and the bid-ask spread, which is the cost you actually pay when you trade a thinly traded ETF

AMFI and each fund's own fact sheet publish all three.

Takeaway. Gold ETFs and SGBs solve different problems. SGBs add 2.5% interest and an exempt capital gain but tie the money to an 8-year window; gold ETFs stay sellable on any trading day, at 12.5% past a year plus an annual expense drag. Your holding period decides which trade-off you are making.