Gold ETF — deep dive into structure and use

Each unit represents fractional ownership of physical gold held by the fund. Trades on exchange like a stock.

ProfitGuruOnline · Editorial Desk

5 min read Last reviewed 9 Jun 2026 2 primary sources

Gold ETFs are SEBI-regulated open-ended mutual funds that hold physical gold as the underlying asset. Each unit represents fractional ownership of the gold held by the fund's custodian. Unlike traditional mutual funds, ETF units trade on stock exchanges like equities — investors buy and sell at live market prices through demat accounts. Gold ETFs are the most efficient way for Indian investors to gain pure gold-price exposure.

How Gold ETFs work

The fund accepts cash from investors.
Cash is used to buy physical gold (LBMA London Good Delivery standard or equivalent).
Gold is stored with a custodian (typically a major bank with secured vaults).
Units are issued; each unit represents fractional ownership of the gold stock.
Unit price tracks gold price (with small tracking differences).

Unit structure

Different Gold ETFs have different unit-to-gold ratios:

Some 1 unit = 1 gram of gold.
Others 1 unit = 0.5 gram or 0.01 gram (smaller denominations).
The unit price reflects current gold price × the gold-per-unit ratio.

Comparison to physical gold

Feature	Gold ETF	Physical Gold
Purity	995 (LBMA standard)	22-24K typical
Making charges	None	Substantial for jewellery
Storage costs	Implicit in TER (~0.50%)	Locker fees, insurance
Liquidity	Live exchange trading	Selling at jeweller / dealer
Counterparty risk	AMC + custodian	None (physical possession)
Selling spread	Bid-ask spread (typically 0.1-0.5%)	5-15% below current price
Authenticity	Fund-managed	Requires verification

Comparison to Gold Mutual Funds (FoFs)

Gold mutual funds typically invest in gold ETFs of the same AMC. They exist primarily because gold ETFs don't natively support SIPs. Trade-offs:

Gold FoF advantages: SIP-friendly, no demat required, monthly accumulation easier.
Gold ETF advantages: lower expense ratio, live pricing, direct exposure.

Comparison to Sovereign Gold Bonds

Feature	Gold ETF	SGB (held to maturity)
Liquidity	Live exchange	8-year maturity for tax-free benefit
Capital appreciation	Yes	Yes
Annual interest	None	2.5% on initial investment
Tax at maturity / sale	12.5% LTCG without indexation (post-2025 units)	Tax-free at maturity
Counterparty	AMC	RBI (sovereign)

SGBs are more tax-efficient for long-horizon holders willing to hold 8 years. Gold ETFs are more liquid for flexibility.

Tax treatment

Gold ETFs follow non-equity mutual fund tax rules:

Units bought before 1 April 2023: pre-2023 regime (20% LTCG with indexation above 36 months).
Units bought 1 April 2023 to 31 March 2025: Finance Act 2023 regime (slab rate regardless of holding).
Units bought on or after 1 April 2025: Finance Act 2024 regime (12.5% LTCG without indexation above 24 months).

Where Gold ETFs excel

Portfolio diversification

Gold's historical correlation with equity is low (occasionally negative). A 5-10% gold allocation reduces portfolio volatility.

Inflation hedge

Gold has historically preserved purchasing power over long periods. INR-denominated gold benefits from both global gold price moves and INR depreciation.

Crisis hedge

During global crises (2008, 2020), gold typically appreciates as investors seek safety. The portfolio insurance value can be substantial during equity drawdowns.

Tactical asset

Investors with views on inflation, currency, or geopolitical risk can use Gold ETFs to express those views.

Where they don't excel

Long-term wealth growth: gold's historical real return (after inflation) is around 1-2%. Equity compounds much faster.
Income generation: no dividends or interest from holding gold.
SIP convenience: Gold ETF SIPs require demat-account-based execution; Gold FoFs are simpler.

Operational requirements

Demat account required.
Trading account with a broker that supports Gold ETFs.
Live trading during exchange hours.
Bid-ask spread applies (typically small for liquid ETFs).

Cost structure

Gold ETF expense ratios:

Typically 0.50-0.80% per year.
Slightly higher than gold mutual fund alternatives in some cases.
Includes physical custody costs.

Choosing a Gold ETF

Liquidity: higher daily trading volumes = tighter spreads.
Tracking accuracy: how closely does the ETF match gold price movement?
Expense ratio (lower is better).
Custodian reputation.
AUM (larger typically = better liquidity).

Position sizing

For most Indian portfolios:

5-10% of total portfolio in gold (combination of ETF / FoF / SGB).
Higher (10-15%) for inflation-hedging-focused investors.
Less for pure-growth-focused investors.

Allocation methodology

Within the gold allocation, the choice between products:

Long-term hold (8+ years): SGB primary (tax-free at maturity).
Tactical / flexible: Gold ETF (liquid trading).
SIP-based accumulation: Gold FoF (SIP-friendly).

The rebalancing benefit

Gold's low correlation with equity makes it valuable for rebalancing. When equity falls and gold rises (or holds), rebalancing from gold to equity buys low. When equity rises and gold lags, rebalancing from equity to gold sells high.

This rebalancing benefit accrues from the structural diversification, even if neither asset class outperforms in absolute terms.

Holding period strategy

Buy and hold for 24+ months to qualify for LTCG (12.5% post-2025).
Don't trade Gold ETFs short-term — STCG at slab rate is unattractive.
For long horizons, compare to SGB which is tax-free at maturity.

The strategic role

Gold ETFs serve a specific role in modern portfolios: providing exposure to a non-correlated asset class with inflation-hedging and crisis-hedging properties. The allocation isn't about chasing gold returns; it's about portfolio risk management.