Gold has always been a preferred investment choice in India, symbolising wealth, security and prosperity. With its historical significance, stability, and ability to hedge against inflation, gold remains an integral part of investment portfolios. However, investing in physical gold has taken a backseat in recent years due to security concerns, storage hassles, and making charges. This has led to the rise of Gold Exchange-Traded Funds (Gold ETFs), which offer the benefits of gold investment without its traditional drawbacks.

Gold ETFs are an excellent investment option for individuals looking to diversify their portfolios while maintaining liquidity. In this blog, we will explore everything you need to know about investing in Gold ETFs in India, from understanding what they are to how you can start investing in them today.

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What is a Gold ETF?

Gold ETFs are exchange-traded funds that invest in gold and track its market price. Each unit represents physical gold, typically 99.5% pure, stored securely by fund houses. These funds are traded on stock exchanges just like shares, making them a convenient and hassle-free way to invest in gold without actually holding it in physical form.

In simple terms, Gold ETFs provide investors with the opportunity to invest in gold without the risks associated with physical ownership, such as theft, impurity, or storage concerns. The performance of Gold ETFs is directly linked to the gold prices in the market, making them an attractive investment option for those who want to benefit from gold’s value appreciation.

Understanding Gold Exchange Traded Funds

Gold ETFs function similarly to mutual funds but are traded on the stock exchange like equities. When you invest in a Gold ETF, you are essentially purchasing gold in a dematerialised form. The asset management company (AMC) that manages the ETF holds physical gold equivalent to the ETF units issued.

Key Features of Gold ETFs:

Listed on stock exchanges: Gold ETFs are traded on the NSE and BSE.
Backed by physical gold: Each unit represents a certain quantity of gold.
High liquidity: Easily bought and sold on exchanges.
No storage concerns: Unlike physical gold, you don’t need lockers or safety measures.
Purity assurance: Gold ETFs are backed by 99.5% pure gold

How do Gold ETFs work?

Gold ETFs pool investor money to buy physical gold, which is securely stored by fund houses. The value of Gold ETFs fluctuates per gold price, and investors can buy or sell units through stock exchanges during market hours. Since they are backed by physical gold, they provide a transparent and cost-effective alternative to traditional gold investments.

How is Gold ETF Priced?

The price of a Gold ETF is directly linked to international gold prices and domestic factors like currency exchange rates and demand-supply dynamics. Unlike physical gold, Gold ETFs are free from making charges and purity concerns, ensuring fair pricing.

Gold ETFs vs. Physical Gold vs. Sovereign Gold Bonds (SGBs)

Feature	Gold ETFs	Physical Gold	Sovereign Gold Bonds (SGBs)
Liquidity	High	Moderate	Low (Lock-in period applies)
Storage Costs	No	Yes	No
Purity Concerns	None (99.5% pure)	Possible	Not applicable
Interest Earnings	No	No	Yes (Fixed interest rate)
Tax Benefits	Yes (on LTCG after 3 years)	Limited	Exemptions on maturity
Tradability	High	Low	Moderate (Can be traded after lock-in)

Gold ETF Pricing And Its Basic Standards

The pricing of Gold ETFs is determined by the prevailing gold prices in the market. Since Gold ETFs are backed by physical gold, their value fluctuates based on global and domestic gold prices.

Factors Affecting Gold ETF Pricing:

International Gold Prices: The price of gold in international markets directly influences the value of Gold ETFs in India.
Currency Exchange Rates: Since gold is traded in USD globally, changes in the USD-INR exchange rate impact Gold ETF prices.
Demand and Supply: The demand for gold in the domestic market affects Gold ETF prices.
Market Trends: Investor sentiment and economic conditions can impact gold prices and, in turn, Gold ETFs.
Fund Expenses: Expense ratios of Gold ETFs also play a role in the final price of the fund.

Points to Bear in Mind When Investing in Gold ETFs

Before investing in Gold ETFs, you should consider the following factors to make informed decisions:

Market Timing: Gold prices are influenced by macroeconomic trends, inflation, and geopolitical events. Understanding market cycles can help in making informed investment decisions.
Expense Ratio: This is the cost that fund houses charge for managing Gold ETFs. A lower expense ratio ensures higher net returns for investors.
Liquidity: Always check the trading volumes of a Gold ETF before investing. Higher liquidity ensures that you can buy or sell units easily without significant price impact.
Tracking Error: Gold ETFs aim to replicate gold prices, but slight deviations can occur due to fund management fees and operational expenses. Lower tracking errors indicate a more efficient ETF.
Investment Horizon: Gold ETFs are ideal for medium to long-term investment rather than short-term speculation. Investors should align their financial goals with the expected holding period.
Taxation: Gold ETFs attract capital gains tax. If held for less than three years, gains are taxed as per the investor’s income slab. If held for more than three years, long-term capital gains tax with indexation benefits applies.
Fund House Reputation: Choose ETFs managed by reputed fund houses with a track record of reliability and transparency.
Storage and Security: While Gold ETFs eliminate storage issues, it is essential to invest through a secure and well-regulated financial institution to avoid counterparty risks.

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How To Invest In Gold ETF?

Here’s a more detailed breakdown of how to buy and invest in Gold ETFs in India:

Step 1: Open a Demat and Trading Account

Gold ETFs are traded on stock exchanges, just like shares. To invest, you need:

A Demat account to hold your ETF units in electronic form.
A trading account with a registered stockbroker to buy and sell Gold ETFs.
You can open these accounts with stockbrokers like Zerodha, Upstox, ICICI Direct, HDFC Securities, or through banking institutions.

Step 2: Choose the Right Gold ETF

Before investing, research and compare different Gold ETFs based on:

Expense ratio: Lower expense ratios mean lower costs for investors.
Liquidity: ETFs with higher trading volumes ensure easy buying and selling.
Tracking error: Lower tracking errors mean better alignment with actual gold prices.
Fund house reputation: Opt for ETFs managed by reputed institutions.

Step 3: Place a Buy Order

Log into your trading account and search for your preferred Gold ETF.
Enter the quantity or investment amount and place a buy order during market hours.
Gold ETFs are traded in units, and the price per unit depends on prevailing gold prices.

Step 4: Monitor Your Investment

Regularly track the performance of your Gold ETF.
Monitor gold price trends and economic conditions affecting gold prices.
Adjust your investment strategy based on market movements.

Step 5: Selling or Redeeming Your Gold ETF

If you decide to sell, place a sell order through your trading account.
The proceeds are credited to your bank account after settlement.
Unlike physical gold, Gold ETFs cannot be converted into jewellery or bullion directly.

Benefits of Investing in Gold ETFs

Investing in Gold ETF offers several advantages over traditional gold investments and let’s have a quick look at how;

Convenient & Secure – No risk of theft, damage, or storage issues compared to physical gold.
High Liquidity – Unlike physical gold, which may take time to sell, Gold ETFs can be bought and sold instantly during market hours.
Tax Efficiency – Gold ETFs attract lower capital gains tax compared to physical gold investments, making them a more tax-friendly option.
Transparent Pricing – No hidden costs, making charges, or concerns about gold purity. Prices are directly linked to international gold rates.
Portfolio Diversification – Gold ETFs act as a hedge against inflation and economic downturns, offering stability to your investment portfolio.
Ease of Trading – Can be traded through a Demat account just like stocks, providing flexibility to investors.
No Making or Wastage Charges – Gold ETFs have no such fees, unlike gold jewellery, where additional costs like making charges and wastage apply.
Cost-Effective – Since Gold ETFs do not require physical storage, investors save on locker charges, insurance, and other related expenses.

Gold ETF Charges: What to Expect?

While Gold ETFs provide a cost-effective alternative to physical gold, they do involve certain fees and expenses that investors should be aware of. These charges include:

1. Expense Ratio

The expense ratio is an annual fee charged by the fund house to manage the ETF. It covers administrative costs, fund management, and operational expenses. Typically, this charge ranges between 0.5% to 1% of the investment value, making Gold ETFs more affordable than actively managed funds.

2. Brokerage Fees

Since Gold ETFs are traded on stock exchanges, investors need to pay brokerage fees when buying or selling units. The brokerage fee varies based on the broker and the volume of trade, usually falling between 0.01% to 0.5% per transaction. Choosing a discount broker can help minimise these costs.

3. Demat Account Charges

To hold Gold ETFs, investors must have a Demat account, which incurs:

Account Opening Charges – Some brokers offer free account opening, while others may charge a nominal fee.
Annual Maintenance Charges (AMC) – Ranges from ₹200 to ₹1,000 per year, depending on the broker.
Transaction Fees – Some depositories may charge a nominal fee for crediting or debiting ETF units in your account.

4. Securities Transaction Tax (STT)

Unlike stocks, Gold ETFs do not attract STT, making them more cost-effective compared to direct equity investments.

5. GST on Brokerage & Other Charges

Goods and Services Tax (GST) of 18% is applicable on brokerage fees and transaction charges.

6. Exit Load

Most Gold ETFs do not impose an exit load, meaning investors can redeem their units without any additional charges. However, it’s always advisable to check individual fund policies.

How to Reduce Gold ETF Charges?

Choose ETFs with a low expense ratio to maximise returns.
Opt for a low-cost brokerage to minimise trading fees.
Keep an eye on liquidity, as higher liquidity ensures tighter spreads and lower impact costs.

Selecting The Right Gold ETF

Investing in Gold Exchange Traded Funds (ETFs) in India offers a convenient and secure way to gain exposure to gold without the challenges of physical storage. To make informed investment decisions, it’s essential to consider several key factors when selecting a Gold ETF:

Expense Ratio: This annual fee covers the fund’s management and operational expenses. Lower expense ratios can enhance net returns over time.
Tracking Error: This measures how closely the ETF mirrors the performance of physical gold prices. A lower tracking error indicates more accurate replication.
Liquidity: ETFs with higher trading volumes offer better liquidity, facilitating easier buying and selling without significantly impacting the price.
Assets Under Management (AUM): A higher AUM often reflects investor confidence and can contribute to better liquidity and fund stability.
Fund Performance: Review the historical performance of the ETF to assess its returns over different time frames, keeping in mind that past performance doesn’t guarantee future results.
Fund House Reputation: Investing with established and reputable fund houses can provide added assurance regarding fund management practices.

Carefully evaluate these factors to select a Gold ETF platform that aligns with your investment objectives and offers a balanced approach to gaining exposure to gold. In case you’ve been looking, Pentad is one of the best Gold ETF platforms in India.

Why Choose Gold ETFs Over Physical Gold

Investing in Gold Exchange Traded Funds (ETFs) offers several advantages over purchasing physical gold, particularly in the Indian context. Here are key reasons to consider Gold ETFs:

Cost Efficiency: Physical gold purchases often involve additional costs such as making charges, storage fees, and insurance expenses. In contrast, Gold ETFs typically have lower associated costs, primarily limited to brokerage fees and minimal fund management charges.

Liquidity and Convenience: Gold ETFs can be bought or sold on stock exchanges during trading hours, providing high liquidity and ease of transaction. This flexibility allows investors to respond swiftly to market movements without the need to visit physical stores or deal with potential delays in selling physical gold.

Purity and Standardisation: Each unit of a Gold ETF corresponds to a specific quantity of pure gold, ensuring consistent quality and eliminating concerns about adulteration or varying purity levels that can be associated with physical gold purchases.

Security and Storage: Holding physical gold necessitates secure storage solutions to prevent theft or loss, often incurring additional costs. Gold ETFs, being electronic securities, eliminate these concerns, as they are held in dematerialised form within your trading account.

Tax Efficiency: In India, long-term capital gains from Gold ETFs (held for more than three years) are taxed at a rate of 20% with indexation benefits, which can be more favourable than the taxation on physical gold.

Market Accessibility: Gold ETFs provide exposure to the performance of gold without physical possession, allowing for easier portfolio diversification and investment management.

While physical gold holds cultural significance and offers the advantage of tangible ownership, Gold ETFs present a modern investment avenue that addresses many of the logistical and financial challenges associated with physical gold. Investors should assess their objectives and circumstances to determine the most suitable form of gold investment.

Why Pentad?

Pentad Securities is an Online Share Trading and Investment Broker in India, that specialises in goal-based investing to help clients achieve their financial objectives.

Pentad offers

Expert Guidance: Pentad provides access to seasoned financial advisors who can help tailor investment strategies to your specific goals.

Competitive Charges: With transparent and competitive fee structures, Pentad ensures that more of your money is working for you.

Robust Security Measures: Pentad employs advanced security protocols to protect your investments and personal information.

User-Friendly Platform: Pentad’s intuitive online interface makes it easy to manage your investments, track performance, and make informed decisions.

Proven Track Record: With a history of reliable service and satisfied clients, Pentad has established itself as a reputable partner in the investment community.