Gold ETFs catch investors' attention: Are these more than just digital gold?

With no new Sovereign Gold Bonds (SGBs) issued recently, gold exchange-traded funds (ETFs) have seen a surge in popularity. Net inflows into gold ETFs crossed Rs 9,100 crore from April to December, which is more than the combined Rs 8,442 crore inflows of the last three financial years.

As more money flows in, investors are asking: How do gold ETFs actually work? Here's a simplified breakdown.

1. Gold purchase and redemption process (what happens when you invest?)

When you buy or sell Gold ETF units on the stock exchange, you're simply trading with other investors—just like stocks. No physical gold is bought or sold because the units already exist in the market.

New ETF units are generally created when there's a massive buy order, typically made by institutional investors, including the fund house itself. These units are then traded on the stock exchange.

That said, your units are backed by physical gold stored securely, and the price you pay reflects the gold's current market value.

2. So, gold ETFs are backed by real physical gold?

That's right. What's more, the gold must be of 99.5 per cent purity or higher, meeting SEBI's strict standards. SEBI regulations also ensure the gold reserves match the units issued.

3. Where is the gold stored, and who pays for it?

The gold backing gold ETFs are stored in high-security vaults, LBMA-approved (London Bullion Market Association) or similar trusted facilities in India.

Costs? Storage, insurance and security fees are covered under the expense ratio of the ETF, a small annual charge deducted from your holdings.

4. Who protects and monitors the gold?

• Custodians are responsible for the safe storage of the gold in approved vaults. The custodian ensures the physical gold is audited and safeguarded against any risks.
  
• Trustees oversee the entire process to ensure that the gold held matches the gold ETF's declared holdings.

5. How can you be sure the gold actually exists?

Gold ETFs undergo regular third-party statutory audits by independent agencies. Auditors verify the amount of gold stored and whether they meet the 99.5 per cent purity standard.

6. Who ensures fairness and transparency?

Gold ETFs are tightly regulated by SEBI. There are two key rules: one, at least 95 per cent of the ETF's corpus must be invested in physical gold. Two, the remaining amount can be held in cash or liquid instruments for operational flexibility.

Conclusion
Since the government is not issuing fresh SGBs and the older ones are trading at a premium, gold ETFs offer a secure, flexible and regulated way to invest in gold without the hassles of physical storage.

Also read: The golden journey