Gold ETFs vs gold funds: which one should you buy now?

Gold has been enjoying a dream run in 2025. Prices are close to all-time highs, and investors are waiting in line to invest in “financial gold” as opposed to jewellery. Gold ETFs have reached $10 billion in India because of strong festive demand as well as a global rush for safe-haven assets. Although gold ETFs as well as gold mutual funds are easily accessible to retail investors, the big question is—precisely which one is best for you?

How they function

A gold ETF is traded on the stock exchange and holds physical gold outright to mirror home prices. You can buy or sell units at your convenience when the market is open, the same as you do with a stock. That means you will need a Demat and trading account, and your profits are somewhat exposed to bid–ask spreads and market liquidity.

Gold Funds invest in a gold ETF on your behalf. Invest through SIPs, don’t set up Demat, and buy or sell at the day’s NAV. It’s best for those who prefer the convenience of mutual fund investing over trading.

Tracking error: which tracks gold more closely

Tracking error merely illustrates the extent to which the return of the fund mirrors real gold prices. Gold ETFs tend to do well in this area as they deal in bullion directly and trade throughout the day. Gold funds might have a higher tracking error since they’re one step out—it invests in ETFs instead of the gold itself. When comparing funds, look at their factsheet to compare recent tracking error figures and use those which have consistently been low.

Fees and cost

Gold ETFs have lower expense ratios—typically less than 1 percent—but you pay a brokerage and cope with spreads if you sell or buy. Gold funds carry an added cost since they invest in ETFs. You don’t have to pay brokerage, but the total expense ratio could be higher. The golden rule is: lower cost and more exact tracking equal sound performance in the long run.

Liquidity and convenience

If control is your forte, ETFs give you the flexibility. You are free to buy or sell at any moment within market hours, and this will enable you to react swiftly to movements in the price. But if you prefer a carefree, set-it-and-forget-it

approach, gold mutual funds are convenient. You can start a SIP for as little as Rs 500 or Rs 1,000 and add to your gold holding in small portions over a period of time.

So, what do you use?

If you already have a Demat account and want your returns to closely track gold prices, invest in a high-liquidity gold ETF with low charges. If you are an investment novice, invest in SIPs, or want an easy entry point to add gold to your investment portfolio, go for a gold fund, which is the more convenient option.