Explore what gold ETFs are, how they track gold prices, and how they provide exposure to gold without purchasing physical metal.
A Gold Exchange-Traded Fund (ETF) is a financial product that allows investors to gain exposure to the price movements of gold without the need to physically own the metal. Gold ETFs are traded on stock exchanges similar to shares, making them a convenient and liquid investment option for individuals and institutions looking to invest in gold. Instead of buying physical gold, investors buy units of the ETF, each of which represents a specific quantity of gold held by the fund.
Gold ETFs are structured to track the price of gold by holding physical gold or gold futures contracts. Here is how they work:
Underlying Asset: The ETF holds gold bullion or gold-related financial instruments like futures contracts.
Units: Investors purchase units of the ETF, each representing a certain amount of gold. The value of these units changes based on the price of gold.
Pricing: The price of a Gold ETF is based on the Net Asset Value (NAV) of the gold held by the ETF. The NAV is calculated at the end of each trading day based on the value of gold holdings.
Gold ETFs provide a method of gaining exposure to gold without storage or handling requirements.
Consider the following table:
| Feature | Gold ETF | Physical Gold |
|---|---|---|
Storage |
No storage needed, held digitally |
Requires secure storage at home or in a vault |
Liquidity |
Highly liquid, traded on stock exchanges |
Less liquid, may require selling to dealers or auctions |
Cost |
Management fees (low) |
Premiums on purchase and storage fees |
Purity |
High purity (close to 99.5%) |
Varies based on form (coins, bars, jewellery) |
Accessibility |
Easily accessible through brokers |
Limited to physical locations or dealers |
Gold ETFs are traded on stock exchanges and typically provide exchange-based liquidity and lower storage-related costs compared to holding physical gold.
Here is how these two gold investment options differ:
| Feature | Gold ETF | Gold Mutual Fund |
|---|---|---|
Returns |
Tied directly to the gold price |
Tied to gold performance and fund management |
Cost |
Lower fees (typically tracking fees) |
Higher management fees |
Risk |
Direct exposure to gold price volatility |
May have diversification with other assets |
Structure |
Investment in gold itself |
Investment in gold-related securities (stocks, bonds) |
Gold ETFs provide direct exposure to gold prices, while gold mutual funds may invest in gold-related instruments and can include broader portfolio strategies.
The price of Gold ETFs in India is determined by the NAV, which is closely linked to the price of gold in the international market. Factors like demand, supply, and currency fluctuations can also affect the price. The price is updated regularly during trading hours, and investors can buy or sell ETF units at prevailing market prices.
To understand Gold ETF share price, investors may check the NAV, which represents the current value of gold per unit of the ETF. The share price is generally close to the NAV, but slight variations can occur due to supply and demand dynamics on the exchange.
Some of the risks and limitations of investing in Gold ETFs include:
Market Risk: As gold prices can be volatile, ETFs are subject to fluctuations based on market conditions.
Tracking Error: The ETF might not perfectly track the price of gold due to management fees or other fund expenses.
No Physical Delivery: Gold ETFs do not allow physical redemption of gold, so investors cannot receive physical gold.
Gold ETFs generally deliver returns in line with the performance of gold. Historical returns tend to reflect the price movement of gold over time, while expected returns depend on the outlook for gold prices. Investors may consider long-term trends in gold prices when investing in these ETFs.
In India, investing in Gold ETFs requires a Demat account and a trading account with a registered broker. Once these accounts are established, Gold ETF units can be bought and sold on the stock exchange in the same manner as shares or other ETFs. Gold ETFs provide a market-linked approach to gold exposure, allowing investors to participate in gold price movements without holding physical metal.
In India, Gold ETFs are treated as capital assets for taxation purposes. If held for more than three years, gains on redemption are classified as long-term capital gains (LTCG) and taxed at 20% with indexation benefits. Gains on units held for three years or less are treated as short-term capital gains (STCG) and taxed at the applicable income tax slab rates. Tax Deducted at Source (TDS) is not typically applicable on capital gains from Gold ETFs for resident investors, though it may apply in certain cases for non-resident investors.
An example of how to compute returns for a Gold ETF may be based on price changes in the gold market. For example, if the price of gold rises from ₹50,000 to ₹55,000 per gram, and an investor owns 10 grams through an ETF, the returns will be calculated as:
Initial investment: ₹50,000 x 10 = ₹500,000
New value: ₹55,000 x 10 = ₹550,000
Return: ₹550,000 - ₹500,000 = ₹50,000 (10% return)
Gold ETFs are market-linked instruments that mirror gold price movements and trade on exchanges like shares. Understanding their structure, pricing, risks, and taxation might help to evaluate how they function within different investment approaches.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The full form of Gold ETF is Gold Exchange-Traded Fund.
Gold ETF prices are determined by the NAV, which is based on the real-time price of gold in the international markets.
No, Gold ETFs do not allow physical redemption of gold. They are a paper-based investment tied to gold’s market value.
Gold ETF returns are taxed as capital gains. Long-term capital gains (held over three years) are taxed at 20% with indexation, while short-term gains are taxed at the investor’s income tax slab rate.
Gold ETFs typically do not pay dividends as they are designed to track the price of gold, rather than distribute earnings.