Investing in Gold ETFs: What You Need to Know

Your grandmother probably has a safe full of gold jewellery. Your mother likely bought a few coins during Dhanteras. And chances are, you’ve wondered if there’s a smarter way to invest in gold without dealing with lockers, making charges, and the constant worry about purity. Enter Gold ETFs.

Gold has always been India’s favourite asset. We buy it for weddings, festivals, and as a hedge against uncertainty. But physical gold comes with problems. Storage costs money. Purity can be questionable. And selling it quickly at a fair price? That’s another challenge altogether.

Gold ETFs solve these problems while giving you exposure to gold’s price movements. Think of them as owning gold without actually holding it. You get all the benefits of gold ownership minus the headaches. Let me walk you through everything you need to know to make an informed decision.

What Exactly Are Gold ETFs?

A Gold ETF is a mutual fund that invests in physical gold of 99.5% purity. Each unit of the ETF represents one gram of gold (though some ETFs use different denominations). The fund house buys and stores the actual gold in vaults. You simply own units that track gold’s price.

These ETFs trade on stock exchanges just like regular shares. You can buy them through your demat account during market hours. The price moves in line with domestic gold prices throughout the trading day. So if gold prices rise by 2%, your ETF units should also increase by roughly 2%.

The fund manager’s job is straightforward. They buy physical gold, store it securely, and ensure the ETF’s price mirrors the market price of gold. There’s no active management or stock picking involved here.

Why Consider Gold ETFs Over Physical Gold?

1. Purity is guaranteed

When you buy physical gold, you’re at the mercy of the jeweller’s word and a hallmark certificate. Gold ETFs eliminate this uncertainty. The fund holds standardised gold bars of 99.5% purity. You don’t need to worry about impurities or alloys.

2. No making charges or wastage

Buy a gold chain and you’ll pay 15-25% in making charges. Sell it back and you’ll lose another chunk to wastage deductions. Gold ETFs have none of this. You pay a small annual expense ratio (typically 0.5-1%) and that’s it. The buying and selling happen at prices very close to the actual gold rate.

3. Liquidity when you need it

Try selling physical gold quickly at a fair price. You’ll visit multiple jewellers, negotiate, and likely settle for less than the market rate. Gold ETFs can be sold instantly during market hours at transparent prices. The money hits your account in two working days.

4. No storage worries

Physical gold means either a bank locker (with annual fees) or hiding it at home (with security risks). Gold ETFs sit in your demat account. No additional storage costs. No theft concerns.

5. Easy to track and manage

Your gold ETF holdings appear in your demat account alongside your shares. You can monitor their value in real-time. Portfolio rebalancing becomes simple because buying or selling is just a few clicks away.

Understanding the Costs

Gold ETFs aren’t completely free. Here’s what you’ll pay:

The expense ratio ranges from 0.5% to 1% annually. This covers the fund’s operating costs including storage, insurance, and management fees. On a ₹1 lakh investment, you’re looking at ₹500-1,000 per year.

You’ll also pay the standard brokerage charges when buying or selling units, just like you would for shares. This is typically 0.03-0.05% for delivery transactions. STT (Securities Transaction Tax) of 0.001% applies on the sale.

Compare this to physical gold. A 10-gram gold coin might cost you ₹500-1,000 extra just in premiums above the gold price. A locker costs ₹3,000-5,000 yearly. The ETF route usually works out cheaper for investment purposes.

Tax Treatment You Should Know

Gold ETFs are taxed like non-equity mutual funds. The rules changed recently, so pay attention.

If you sell within three years, the gains are added to your income and taxed at your applicable slab rate. This is called short-term capital gains.

For units held beyond three years, you pay 20% tax on the gains after indexation benefits. Indexation adjusts your purchase price for inflation, which reduces your taxable gains significantly. This long-term capital gains treatment makes Gold ETFs more tax-efficient than physical gold for long-term holding.

Physical gold held for over three years gets the same 20% tax with indexation. But Gold ETFs offer better tracking and liquidity, making them the preferred choice for many investors.

How to Buy Gold ETFs

The process is straightforward if you already invest in stocks:

You need a demat account and a trading account. Most investors already have these. If not, opening one takes a few days with any broker.

Log into your trading platform and search for gold ETFs. Popular ones include HDFC Gold ETF, ICICI Prudential Gold ETF, SBI Gold ETF, and Nippon India Gold ETF. Choose based on expense ratio and liquidity (higher average daily volumes mean easier buying and selling).

Place an order just like you would for shares. You can use market orders for instant execution or limit orders to buy at a specific price. One unit typically equals one gram of gold, so if gold is trading at ₹6,500 per gram, one ETF unit will cost approximately ₹6,500.

The units appear in your demat account within two working days. You can track their value and sell them whenever you want during market hours.

Important Considerations Before Investing

Check the expense ratio: Lower is better. A difference of 0.5% might seem small but compounds over the years. A ₹10 lakh investment over 10 years could mean ₹50,000 in additional costs with a higher expense ratio.

Look at liquidity: Choose ETFs with higher average trading volumes. This ensures you can buy or sell easily without significant price impact. Check the average daily traded value before investing.

Understand tracking error: The ETF’s price should closely follow gold prices. Small deviations are normal, but consistently large gaps indicate problems. Compare the ETF’s NAV with actual gold prices over time.

Don’t confuse with Gold Funds: Gold ETFs and Gold Funds are different. Gold Funds are mutual funds that invest in Gold ETFs. They add another layer of expense ratio. For most investors, buying Gold ETFs directly makes more sense.

How Much Should You Allocate?

Gold serves as a portfolio diversifier and inflation hedge. Financial planners typically recommend 10-15% allocation to gold in a balanced portfolio. This allocation can cushion your portfolio during equity market downturns.

If you’re young and have a high risk appetite, you might go lower at 5-10%. If you’re conservative or nearing retirement, you could increase it to 15-20%. The exact percentage depends on your overall asset allocation strategy, risk tolerance, and financial goals.

Rebalance periodically. If gold does well and grows to 20% of your portfolio, consider selling some to maintain your target allocation. If it drops to 5%, you might add more.

To Sum Up

Gold ETFs offer a practical way to own gold without the traditional hassles. You get purity, liquidity, and convenience at a reasonable cost. The tax treatment for long-term holdings is favourable, and tracking your investment is simple.

Start with a small allocation. Buy a few units to understand how they work. Monitor how they perform relative to gold prices. Once comfortable, scale up to your target allocation. Most importantly, treat gold as a portfolio diversifier, not a primary wealth creator. Your equity investments will do the heavy lifting for wealth creation over time, and gold will provide stability when markets get choppy.