Gold vs silver ETFs or FoFs: How to choose the right route to invest

ETFs offer cost efficiency and real-time pricing, while FoFs bring convenience and simplicity. Experts explain how investors should pick between the two.

With bullion rallying and festival buying sentiment picking up, the spotlight has shifted to paper gold and silver products. Investors are increasingly exploring exchange-traded routes that promise price transparency and ease of access over physical holdings. Gold and silver exchange-traded funds (ETFs) and fund of funds (FoFs) both help investors gain exposure to precious metals without holding them physically. But they differ in how they are accessed, priced, and taxed.

 

According to Nilesh D Naik, head of investment products, Share.Market (PhonePe Wealth), the key difference lies in how units are bought and sold. “ETFs trade on exchanges and require a demat account, offering intra-day liquidity, while FoFs can be purchased directly from the fund house and are priced at end-of-day net asset values,” he explained.

 

 

Naik added that investors comfortable with trading and holding a demat account can benefit from ETFs’ flexibility, whereas those who prefer simplicity or don’t wish to open a demat account can opt for FoFs.

 

Who should invest in which?

Ajay Lakhotia, founder & chief executive officer of StockGro, said ETFs suit younger investors seeking low-cost, direct exposure to gold or silver prices. “A young investor with Rs 10,000 capital can buy ETF units just like stocks, while traditional investors with larger portfolios can choose FoFs for easy diversification without managing technicalities,” he noted.

 

FoFs work well for those who prefer mutual fund-style investing or SIPs, added Ravikumar T, professor, Alliance School of Business, calling them ideal for beginners or passive investors. “Young salaried investors with limited capital prefer ETFs for liquidity, while older investors seeking diversification can invest in FoFs,” he said.

 

Costs, tax, and tracking differences

Experts agree that ETFs enjoy a structural cost edge. As Vishwanathan Iyer, senior associate professor – finance & accreditation, Great Lakes Institute of Management Chennai, explained, “ETFs have expense ratios of 0.25–0.5 per cent versus FoFs’ 0.6–1 per cent, since FoFs add another layer of cost.”

 

 

Taxation also differs.

Naik said, “For ETFs, gains on units held over 12 months are treated as long-term and taxed at 12.5 per cent. For FoFs, the period extends to 24 months.” He added that while ETFs have smaller tracking errors, FoFs may show slightly higher deviations due to their indirect structure.

 

Performance and risk trade-offs

While FoFs closely mirror the performance of their underlying ETFs, slight lags are inevitable.

 

“FoFs’ returns equal ETF performance minus additional costs and cash drag, typically a 0.3–0.7 per cent annual lag,” said Iyer.

 

Naik cautioned investors about liquidity mismatches during volatile markets. “ETFs can trade at premiums or discounts to actual metal prices due to demand-supply gaps,” he warned.

 

Lakhotia gave a real-world example. “During festive demand spikes, silver ETFs in India once traded 10-12 per cent above spot prices, reacting instantly to market sentiment. FoFs, priced on end-of-day NAVs, reflected the move only later.”