First, What Is a Gold ETF?
A Gold ETF is a financial instrument that tracks the price of gold. Each unit of a Gold ETF represents a fixed amount of pure gold, typically one gram of 99.5% pure gold, held in electronic or dematerialized form. These units are traded on stock exchanges,
like the NSE and BSE, just like shares of a company. This allows investors to gain exposure to gold price movements without actually owning the physical metal. The fund house buys and stores the physical gold in secure vaults on behalf of the investors.
Lower Costs and Guaranteed Purity
One of the biggest drawbacks of buying physical gold, especially jewellery, is the extra cost. Making charges can range from 5% to 20% and are non-refundable when you sell. Additionally, buying physical gold attracts a 3% Goods and Services Tax (GST). Gold ETFs have neither making charges nor GST on purchase. They do have a small annual expense ratio to cover management fees. Furthermore, with physical gold, there can be concerns about purity. Gold ETFs, on the other hand, are backed by high-purity, standardized gold, eliminating any such worries.
Superior Liquidity and Convenience
Selling physical gold can be a cumbersome process. You need to find a jeweller, and you might face deductions or a price lower than the market rate. In contrast, Gold ETFs offer high liquidity. They can be bought and sold instantly on the stock exchange during market hours through a demat and trading account. This ease of transaction eliminates the need for physical storage, which carries risks of theft and costs like bank locker fees. The units are held securely in your demat account, accessible online from anywhere.
Favourable Tax Treatment
The tax rules for Gold ETFs can be more advantageous than for physical gold. For physical gold, gains are considered long-term only after a holding period of 24 months. However, for Gold ETFs, the holding period to qualify for long-term capital gains (LTCG) is just 12 months. While the LTCG tax rate is similar, this shorter holding period provides greater flexibility for investors looking to manage their tax liabilities more effectively. Short-term gains for both are added to your income and taxed at your slab rate.
Accessibility for Small, Systematic Investments
Gold ETFs make investing in gold highly accessible. You can start with an investment equivalent to just one gram of gold, making it affordable for everyone. This contrasts sharply with buying physical gold, which often requires a larger upfront amount. Moreover, while mutual fund companies may not offer a direct SIP (Systematic Investment Plan) for ETFs, many stockbrokers provide facilities that allow you to invest a fixed amount regularly. This enables disciplined, long-term wealth creation by averaging out the purchase cost over time, a strategy that is less practical with physical bars or coins.
A Clear Shift in Investor Behaviour
The numbers reflect a significant change in investor preference. Data shows a massive surge in both assets under management (AUM) and the number of investor accounts, or folios, for Gold ETFs in India. Between July 2024 and July 2026, the number of Gold ETF folios more than doubled, increasing by approximately 127%. This rapid growth in participation from retail investors indicates a move towards more mainstream adoption of gold as a financial, rather than just a physical, asset. Investors are increasingly using ETFs as a tool for portfolio diversification and as a hedge against market volatility.
