What is a Gold ETF?

A type of mutual fund scheme pooling investments to track the physical gold is known as Gold ETF. The peculiarity of this instrument is that it can be traded on the stock market like regular equities. Moreover, they provide the exposure of gold returns without storage issues. Investors can explore what is a gold ETF fund, understand its mechanism and evaluate its pros and cons before making an investment decision.

What is a Gold ETF?

Gold ETFs or exchange-traded funds are mutual funds investing in 99.5% pure physical gold. They track the physical gold price. The units of this type of funds can be easily bought/sold on the stock market. However, due to listing on the stock exchange, investors cannot opt for a Systematic Investment Plan (SIP) for gold ETFs.

ETFs are a type of passive investment that will usually replicate the gold price movements. These key features of gold ETFs explain their nature:

• Portfolio: Through gold ETFs, investors can diversify their portfolio with the exposure of physical gold. A unit of gold ETF indicates 1 gm of gold investment.
• Liquidity: These units are listed on the stock market, which helps find buyers easily during the redemption. Moreover, due to market forces, investors can buy or sell the units at multiple price points. The only requirement for trading the gold ETFs is a Demat account. 
• Tax: The gold ETFs are taxed according to the ‘specified mutual funds’ group. Therefore, the tax on these funds will be as per the income tax slab rate of an investor.
• Net Asset Value: The gold ETF NAV will be set according to market forces like regular equities. It is one of the most crucial features distinguishing ETFs from other mutual fund schemes.
• Not a gold fund: Investors usually confuse gold ETFs with gold funds. However, the gold funds are an actively managed mutual fund scheme that cannot be traded on the exchange.

How Does it Work?

Understanding what is gold ETF fund may not be enough, investors should also explore its mechanism. Asset Management Companies (AMCs) design the passive investment schemes of gold ETFs and issue their units in the market. 1 unit of gold ETF will be equivalent to 1 gram of gold. The AMC is the custodian of physical gold investments made indirectly by the investors. 

Units of gold ETFs are listed on the stock exchange. The primary affecting gold ETFs are the domestic prices of physical gold.

Gold ETF Investment: Pros and Cons

A crucial part of exploring the answer to what is gold ETF investment is evaluating its pros and cons to analyse its suitability for an individual investor’s portfolio.

Pros	Cons
The issues of storage, theft, loss, etc., are eliminated due to gold ETFs.	ETFs are passive investments that only track the asset. Investors may lose the extra market returns.
The ETFs track physical gold, which is a rare resource. Therefore, its prices keep rallying, and investors can potentially earn from such rallies.	Gold prices are rising, but they are prone to high volatility due to multiple factors like national reserves, geo-political pressure, etc. This volatility can affect the gold ETFs.
Gold ETFs provide a proper diversification for a portfolio that can act as a hedge against inflation.	Investors need to open a Demat account for transacting this fund’s units on the exchange.
Investors get better liquidity for their investment, due to stock market listing.	Annually, an expense is charged for managing the fund.

How to Invest in Gold ETFs?

After exploring what is gold ETF in India Investors can follow these steps to invest in gold ETFs:

Step 1: Start a Demat account through a brokerage house website or application or consult a financial advisor for the same.

Step 2: Fulfil the ‘Know Your Customer’ or KYC requirements. Submit the documents regarding Permanent Account Number (PAN) card, bank details, etc. 

Step 3: Explore the available options of gold ETFs in the market. Check the financials, like tracking errors, fund house, past performance, etc. 

Step 4: Select the most suitable gold ETF and place the order with no. of units.

Step 5: As discussed, gold ETF prices may be affected by market fluctuations. Therefore, investors should monitor it consistently.

Gold ETF Examples in India

The growth trajectory of gold prices and gold ETFs in India has been impressive in the past few years. The gold prices surged by nearly 26%, and the Asset Under Management (AUM) of gold ETFs in India surged by nearly 64% in 2024. 

Understanding what is gold ETF in India and its growth trajectory may not suffice. Investors can explore some of the examples of gold ETFs in India:

• Axis Gold ETF
• Birla Sunlife Gold ETF
• ICICI Prudential Gold ETF
• HDFC Gold Exchange-Traded Fund
• Invesco India Gold ETF

Conclusion

Gold ETFs are mutual fund schemes investing in physical gold, which can be traded like equity shares on the stock exchanges. This combination of stock market and mutual funds can help investors get desired diversification with easy liquidity. Investors can understand what is gold ETF investment, explore its mechanism, evaluate the pros and cons and make the investment according to their investment aspirations.Log in to PowerUp Money or download its financial planning app to stay updated with financial concepts and transform your financial journey!