What is Gold ETF


Gold the evergreen asset is once again being sought as a safe haven by people and governments alike in the face of the recent global economic turbulence. Holding gold in its physical form has many drawbacks that are making alternatives like gold mutual funds, gold ETFs, etc popular. Gold Exchange Traded Funds are open-ended gold funds listed on stock exchanges. They try to track the price of physical gold. Each unit of the fund purchased corresponds to approximately 1 gram of gold. Like shares they can be bought and sold on the exchange.

We shall give some insight on how gold ETF works. During the New Fund Offer (NFO) the fund house purchases physical gold from authorized participants for the money that has been collected from investors. The fund's custodian keeps stock of the physical gold. As the price of gold changes through the day the value of ETF units also changes. You can buy units in the demat form.

If all gold ETFs attempt to track the price of gold why do they differ in prices? The difference can be attributed to expense ratios of the funds. Expense ratio is the percentage of operating and management charges paid to the AMC. Bigger the expense ratio lesser will be your returns. This will be more significant in long term investment due to the effect of compounding.  Apart from this the portfolio of funds may also differ. The funds may invest a small portion in cash and money market instruments.

Right for you?

A balanced investment portfolio should have about 10% assets in gold. Gold coins and jewelry don't make for smart investment choice. ETFs are the best way to participate in gold assets for many reasons.  For one it is a good portfolio diversifier. Since these funds are passively managed their prices won't deviate much from the price of physical gold. Although gold prices have witnessed upheavals in recent past their long term returns are expected to stay just a little ahead of inflation levels.

Investing in Gold ETF has several advantages over investing in the physical form and in gold mutual funds. Apart from the fact that trouble of storage, protection is eliminated there are other benefits too as discussed below:


Since they're exchange traded you can buy and sell units whenever you please. Retailers may not readily buy the gold that you've bought from another. They may even charge a discount of up to 5%.

True Price

With retailers there is the danger of mispricing as different ones may quote different rate whereas pricing mechanism is more efficient on an exchange.


Gold ETFs buy gold that is 99.5% pure. You have no guarantee of purity of gold you buy from the retailer.

Tax Efficiency

Gold ETFs are treated like non-equity mutual funds for tax purposes. If you sell units before a year of buying them you pay the marginal tax rate as per your tax slab. If your sell them after a year you are liable to pay a tax of 10% without indexation or 20% with indexation, whichever is lower.

There is no wealth tax on gold ETFs whereas holding gold of value over a certain specified limit in the physical form attracts a tax at the rate of 1% of the amount  by which wealth exceeds the limit (Rs 30 lakhs at present).

Investing in it

There are several ETFs available to invest in. The list in Ready Reckoners section will be handy. You obviously want to invest in the best one of those. Your selection criteria must include expense ratio and trading volume. Especially when you're looking at it from a long term investment point of view, even a 0.5% difference in expense ratio will make much difference in your net returns due to compounding.  Expense ratio can be found in the fund's prospectus.

Secondly if a fund is actively traded there won't be any hassles when you want to sell its units. Not all funds traded currently have significant trading volumes to give you smooth liquidity. Choose the fund whose volume of trading is highest among all and has the lowest expense ratio.

Like investing in shares you need to have a demat account and a trading account to buy ETF units. You can open a demat account with registered brokers. Various charges relating to it include account opening fee, annual maintenance fee, transaction fee, conversion fee (for converting securities to electronic form). Refer to Procedures section to know how to invest in gold ETFs. Once you have the account you can select the listed ETF of your choice and place order through your broker's trading portal. At the stock exchange your buy order is matched with a sell order and the transaction is executed. In case of an NFO, the fund house allocates units to you which post its listing can be traded on the exchange where it is listed.

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