What is a gold ETF?

Summary: Curious about why gold ETFs are stealing the spotlight from traditional physical gold? This guide breaks down what gold ETFs are, why they're a smarter (and more tax-efficient) way to invest in gold and how the latest tax rules make them even more attractive for Indian investors looking to add a safety net to their portfolios.

In India, gold has long been a symbol of wealth and security. Generations have kept gold coins, bullion, and jewellery in their lockers. While the idea of gold being an investment is rooted in tradition, it is not the most lucrative way to grow wealth. That's why we've always held the belief that it should be looked at as a hedge against market turmoil and inflation.

However, gold has been rising in popularity among individual investors and has become a reliable store of value for central banks worldwide. As governments stockpile gold to hedge against fluctuations in fiat currencies, the precious metal has begun its resurgence. That's why we have revised our investment case for this asset, albeit slightly. It should still be viewed as a cushion for your portfolio.

Physical gold is still fraught with risks and is an inefficient investment mode. Hence, we introduce you to the concept of gold ETFs, a low-cost and tax-efficient way to invest in this precious metal. So, what is this investment vehicle, and how is it different from the physical form?

What is a gold ETF?

A gold ETF is a passive investment vehicle designed to mirror the price movements of gold. It achieves this by investing in physical gold or gold-related financial instruments, making it a convenient way to own gold without dealing with the challenges of physical storage.

According to SEBI regulations, gold ETFs must maintain at least 95 per cent of their net assets in physical gold or related instruments, with only 5 per cent in cash for liquidity purposes.

Each unit of a gold ETF represents one gram of gold bullion with 99.5 per cent purity. When you invest in a gold ETF, you're essentially acquiring pure gold in digital form. The purity and authenticity are guaranteed by fund audits and regulatory oversight, eliminating concerns about receiving substandard metal.

Since gold ETFs are listed and traded on the stock market, they offer exceptional liquidity and ease of access. The price of a gold ETF on the stock exchange may differ from its NAV (net asset value) due to market dynamics: high demand can drive up the ETF price above NAV, while low demand can lead to it trading at a discount. This is why understanding iNAV (indicative NAV) and asking prices matters for cost-conscious investors. Learn more about how ETFs compare to mutual funds to make an informed choice.

Why should gold be part of your portfolio?

Unlike stocks or bonds, gold is not directly tied to the performance of companies or economies, making it a reliable hedge against financial turbulence. During the 2008 Global Financial Crisis, stock markets experienced massive declines, and even the fixed-income market collapsed. However, gold prices withstood that tough time with more resilience than equity and debt. This outperformance helped cement its investment case among many investors.

Financial experts recommend allocating 5-10 per cent of your portfolio to gold for diversification and inflation protection. This allocation can increase during periods of heightened monetary uncertainty. Importantly, gold's effectiveness as an inflation hedge strengthens over longer holding periods (at least five years), even though short-term correlations with inflation may be weak.

Key advantages of gold ETFs over physical gold

Investing in gold ETFs offers several distinct advantages over purchasing physical gold:

Guaranteed purity: The fund's holdings are audited and meet high purity standards of 99.5 per cent or higher, eliminating the risk of receiving impure or adulterated metal.

No GST burden: Gold purchases incur a Goods & Services Tax (GST) of 3 per cent. Gold ETF investments are exempt from GST, making them significantly more cost-effective at the outset.

Superior tax efficiency: Physical gold requires a two-year holding period for long-term capital gains treatment. Gold ETFs require just one year, making them more tax-efficient for medium-term investors.

Complete protection from theft and loss: Gold ETFs are held electronically in your demat account, eliminating the need for expensive home safes, bank lockers, or private vaults with associated insurance and maintenance costs.

Exceptional liquidity and flexibility: Gold ETFs can be bought or sold at any time during market hours, offering high liquidity compared to the often cumbersome process of selling physical gold. They have no exit loads.

Understanding the latest taxation rules for gold ETFs

The tax structure for gold ETFs underwent significant changes effective from April 1, 2025.

Short-term capital gains (within one year): If you sell your gold ETF units within 12 months of purchase, the entire gain is added to your taxable income and taxed at your applicable income tax slab rate. There is no indexation benefit for short-term holdings.

Long-term capital gains (beyond one year): If you hold gold ETF units for more than one year, long-term capital gains are taxed at a flat rate of 12.5 per cent without indexation benefit. This represents a significant advantage for long-term investors.

Gold ETFs versus gold mutual funds

Gold mutual funds are fund of funds (FoFs) that invest in gold ETFs and require two years for long-term tax treatment, whereas gold ETFs trade directly on stock exchanges, offering lower expense ratios (0.3-0.8 per cent) and quicker long-term tax status (one year). However, ETF investors pay brokerage and statutory charges. For most investors, gold ETFs prove more cost-efficient over the long term.

A modern approach to gold investing

For long-term investors looking to diversify their portfolios, gold ETFs offer an efficient and secure way to invest in gold. Whether you're hedging against market fluctuations, seeking a safe haven during uncertain times, or protecting purchasing power from inflation, gold ETFs are worth considering.

We still don't view gold as an investment but as a cushion for your portfolio. If you choose a gold ETF, choose the investment with the lowest expense ratio and tracking error.

Choosing a gold ETF is relatively easy, but constructing the rest of your portfolio can be challenging at first. If you need helpful guidance, then you can try out Value Research Fund Advisor. Whether it is an equity or debt fund, you'll get complete guidance on how to choose the right one based on your financial goals.

Explore Fund Advisor today

Also read: A comparison between a gold fund and a gold ETF

This article was originally published on December 26, 2024, and last updated on February 04, 2026.