Gold has been the preferred avenue for investment in India for centuries. In recent times, investors have had the option to invest in gold in several ways: Gold exchange-traded Funds (ETFs), digital gold, gold mutual funds and sovereign gold bonds, in addition to buying physical gold.
Among these, gold ETFs can be a cost-effective way to benefit from the potential growth of this commodity. Moreover, unlike physical gold, ETFs also offering liquidity.
In this article, you will understand how to invest in gold ETF funds online in India, exploring the features, benefits, and steps involved.
- Table of contents
- What are gold exchange-traded funds (ETFs)?
- How do gold exchange traded funds work?
- Benefits of investing in gold etf funds
- Types of gold ETFs
- Risks of gold exchange-traded funds
- Why invest in gold exchange-traded funds?
- Four factors to consider when investing in gold exchange-traded funds (ETFs)
- How to invest in Gold ETFs?
- Gold ETF taxation in India
What are gold exchange-traded funds (ETFs)?
A Gold Exchange Traded Fund (ETF) is a type of financial product that tracks the price of gold. The scheme invests in physical gold or gold-related assets, such as gold futures, and its value moves in line with the price of gold in the international markets. In India, Gold Exchange-Traded Funds are listed on major stock exchanges like the National Stock Exchange (NSE) and BSE.
How do gold exchange traded funds work?
Gold exchange traded funds work by pooling money from multiple investors and investing in physical gold or gold-linked assets. These funds are managed by asset management companies (AMCs) that buy and hold gold either in physical or dematerialised form. The value of the ETF shares is directly correlated to the market price of gold.
Features of gold ETFs
Gold Exchange Traded Funds (ETFs) combine the characteristics of gold as an asset class with the structure of market-linked instruments, offering a regulated and transparent way to gain exposure to gold prices.
Exchange-traded structure: Gold ETFs are listed on recognised stock exchanges such as the National Stock Exchange of India and BSE Limited, allowing investors to buy and sell units during market hours through a demat account.
High purity gold exposure: These funds typically invest in gold of 99.5% purity or higher, helping investors access standardised gold exposure without handling physical metal.
Liquidity and transparency: Prices are linked to prevailing domestic gold prices and are visible in real time on exchanges, enabling transparent price discovery and relatively easy entry and exit.
No storage concerns: Since investments are held in electronic form, investors do not need to manage storage or security of physical gold.
Portfolio diversification: Gold ETFs may help diversify a portfolio, as gold often behaves differently from equity and debt assets during certain market phases.
Relatively lower operational costs: Compared to physical gold, there may be lower costs related to making charges or storage, though expense ratios and brokerage charges still apply.
Benefits of investing in gold etf funds
- Higher liquidity: Gold ETFs are traded on stock exchanges, making them highly liquid. You can buy and sell them anytime during market hours, just like stocks.
- More transparency: The price of gold exchange traded funds is updated in real-time based on the gold price, providing complete transparency. Investors can easily track the value of their investments.
- Lower costs: ETFs have relatively low expense ratios compared to other mutual funds, especially active mutual funds.
- Diversification: Gold investments can act as a hedge against inflation and market volatility. When you invest in Gold ETF funds, you can achieve better diversification in your investment portfolio.
Types of gold ETFs
There are several types of gold ETFs available in the Indian market:
- Standard gold ETFs: These are the most common type, investing primarily in 99.5% pure physical gold. Their performance mirrors domestic gold prices, and each unit typically represents one gram of gold.
- Fund of funds (FoFs) investing in gold ETFs: These are mutual fund schemes that invest in gold ETFs instead of holding gold directly. They offer the benefit of investing without a demat account, though they may have slightly higher expense ratios.
Risks of gold exchange-traded funds
These are the four of the risks your investments are subject to when you invest in Gold ETFs:
- Price fluctuations: Gold is a volatile asset, and its price can fluctuate based on global economic conditions, geopolitical events, and currency movements. This could result in short-term fluctuations if the price of gold falls.
- Management fees: Although gold exchange-traded Funds have low fees compared to actively managed funds, there are still fees that can eat into returns over time.
- Liquidity risk: While gold exchange traded funds are generally liquid, in rare cases, they may not be as liquid during times of market stress or volatility.
Why invest in gold exchange-traded funds?
Here are a few reasons why you might consider investing in gold ETF funds online:
- Hedge against inflation: Gold has historically been a good hedge against inflation. When currency values fall, gold prices often rise, making it a haven for investors.
- Diversification: Gold is an effective diversification tool in your investment portfolio. It can help spread overall risk.
- No physical handling: Unlike owning physical gold, you do not have to worry about storage or security. Gold exchange traded funds are convenient to hold, and you can buy or sell them easily.
- Accessibility: Gold ETFs are accessible to small and large investors alike. You can invest in as little as one unit, making it affordable for everyone.
Four factors to consider when investing in gold exchange-traded funds (ETFs)
- Expense ratio: Always consider the expense ratio of the ETF, as it determines the cost of managing the fund. A lower expense ratio is generally desirable since it means better net returns for the investor.
- Tracking error: The tracking error indicates how closely the ETF’s performance mirrors the price of gold. A lower tracking error is preferable for more accurate exposure to gold prices.
- Liquidity: Check the trading volume of the Gold ETF on the exchange. Higher liquidity indicates that it may be easier to buy and sell quickly.
- Fund manager’s reputation: The performance of Gold ETFs depends on the AMC managing them. Choose gold exchange-traded funds managed by reputable and experienced companies with a strong track record.
How to invest in Gold ETFs?
Investing in gold ETF funds online in India is simple and can be done through the following steps:
- Choose a brokerage account: You need a demat and trading account with a registered stockbroker to trade gold ETFs.
- Select a gold ETF: Once your account is set up, research and choose a gold exchange-traded fund.
- Place the order: Place an order for the units through your trading account. You can buy units in real-time at the current market price, just like buying stocks.
- Monitor your investment: After purchasing, keep track of the price movements and performance of your gold exchange traded fund.
Read Also: Silver ETFs: Meaning, Features, Taxation, and How to Invest?
Gold ETF taxation in India
Gold ETFs in India have distinct tax treatment effective April 1, 2025. Capital gains depend on holding period: short-term gains (lesser or equal to 12 months) are taxed at your income tax slab rate, while long-term gains (>12 months) attract a flat 12.5% tax without indexation. No TDS applies for resident Indians on redemption, and STT is not charged.
In conclusion, gold ETFs provide a convenient, cost-effective, and transparent way for Indian investors to gain exposure to gold without the complications of owning physical gold. They offer the advantages of liquidity, low costs, and diversification, making them a suitable addition to a well-diversified investment portfolio. With the right approach, gold exchange-traded funds (ETFs) can be a powerful tool to preserve your wealth and hedge against inflation.
Digital gold vs gold ETF: what’s the difference
Digital gold and gold ETFs both provide exposure to gold prices without requiring physical ownership, but they differ in structure, regulation, pricing, and usage.
Structure and form: Digital gold is offered by fintech platforms and allows investors to buy gold in small quantities, which is held on their behalf by third-party vault providers. Gold ETFs, on the other hand, are mutual fund schemes that invest in physical gold and are traded on stock exchanges.
Regulation: Gold ETFs are regulated by the Securities and Exchange Board of India, which provides a defined framework for transparency and disclosures. Digital gold does not currently fall under a comprehensive regulatory framework in the same manner.
Trading and liquidity: Gold ETFs are listed on exchanges such as the National Stock Exchange of India and BSE Limited, allowing real-time trading during market hours. Digital gold transactions are executed through specific apps or platforms and may have platform-dependent pricing and liquidity.
Pricing mechanism: Gold ETF prices are linked to domestic gold prices and are discovered through exchange trading. Digital gold prices are determined by the provider and may include spreads or additional charges.
Minimum investment: Digital gold allows very small ticket investments, sometimes starting from minimal amounts. Gold ETFs require purchase of at least one unit through the exchange, which depends on prevailing market price.
Things to consider before investing in Gold ETFs
Before investing in Gold ETFs, investors may benefit from evaluating multiple factors that influence return potential, costs, and overall suitability within a portfolio.
Investment objective and time horizon: Gold ETFs are typically used for diversification or as a hedge against certain economic conditions. Investors may consider whether this aligns with their financial goals and investment horizon.
Expense ratio and tracking error: Each Gold ETF charges an expense ratio, which may affect net returns over time. Tracking error indicates how closely the fund follows domestic gold prices, and a lower tracking error may be preferable.
Liquidity on exchanges: Since Gold ETFs are traded on the National Stock Exchange of India and BSE Limited, trading volumes and bid-ask spreads may influence ease of buying and selling units.
Demat and brokerage requirements: Investments require a demat and trading account, along with brokerage charges, which may add to overall costs.
Gold price volatility: Returns depend on gold price movements, which may be influenced by global factors such as currency trends, inflation expectations, and geopolitical developments.
No regular income: Gold ETFs generally do not provide Income Distribution cum Capital Withdrawal (IDCW) payouts, as returns are typically realised through price appreciation.
Portfolio allocation: Exposure to gold may need to be balanced within an overall asset allocation strategy, rather than forming a large portion of the portfolio.
Conclusion
Gold ETFs provide a regulated and transparent way to gain exposure to gold prices without the need to hold physical gold. Traded on exchanges such as the National Stock Exchange of India and BSE Limited, they combine the convenience of market-linked instruments with standardised gold exposure, making them a structured option within the broader mutual fund landscape. At the same time, gold ETFs are subject to price fluctuations in the gold market. Their role is often considered in the context of diversification rather than primary wealth creation. Investors may consider aligning such investments with their financial goals, time horizon, and risk appetite, while reviewing scheme-related factors and conducting due diligence before investing.
FAQs
How are gold ETFs different from physical gold?
Gold ETFs are traded on stock exchanges and electronically held while physical gold requires storage and may incur making charges.
Are gold exchange-traded funds and gold mutual funds the same?
Gold ETFs invest in physical gold or gold-related assets and are traded on stock exchanges. Mutual funds can invest in gold either through ETFs or in gold-related stocks such as gold mining companies.
Are gold ETFs safe?
No, gold ETFs in India are subject to market risk, including fluctuations in the price of gold in the market.
Can I invest in gold ETFs through SIP?
There is typically no Systematic Investment Plan (SIP) in ETFs. An asset management company may offer a variation of an SIP that enables investors to invest in regular instalments. However, not all companies have this provision.
What is the minimum amount required to buy a gold ETF?
The minimum amount required to buy a Gold ETF in India depends on the ETF’s unit price based on the market value at the time of purchase.
What is Gold ETF Taxation?
Gold ETFs are treated as non-equity mutual funds for tax purposes. Short-term capital gains (holding period lesser or equal to 12 months) are taxed as per the investor’s income tax slab. Long-term capital gains (holding period above 12 months) are taxed at 12.5% without indexation benefit.
Are gold ETFs taxable like physical gold?
Gold ETFs and physical gold follow similar taxation structure. Both are classified as non-equity assets. However, physical gold reach LTCG status at 24 months in contrast to the 12-month holding period for ETFs.
Can NRIs invest in Gold ETFs?
NRIs may invest in gold ETFs in India through their NRE or NRO accounts, subject to FEMA guidelines and brokerage compliance. However, not all AMCs offer this facility. It is advisable for NRIs to confirm eligibility, taxation, and repatriation norms before investing.
What are the risks of Gold ETFs?
Gold ETFs carry risks such as market price volatility, tracking error between fund performance and gold prices, and expense ratio impact. Though they may offer diversification benefits, investors must understand that returns depend on gold’s market performance and global economic conditions.
How is the NAV of Gold ETFs calculated?
The NAV of a gold ETF is determined daily based on the market price of physical gold held by the fund, adjusted for expenses and liabilities. It reflects the per-unit market value of gold after accounting for fund management costs.
Gold Fund vs Gold ETF
Gold funds and Gold ETFs both provide exposure to gold, but differ in structure and access. Gold ETFs are listed on stock exchanges and require a demat account for transactions. Gold funds are mutual fund schemes that invest in Gold ETFs, allowing investment without a demat account, with additional expense considerations.
Which ETF is best for gold?
There isn’t a single “best” gold ETF. Most gold ETFs in India track the same underlying gold price, so returns tend to be similar. The difference usually comes from cost, tracking efficiency, and liquidity.
