How Gold ETFs Work in India?

What is a Gold ETF?

A Gold Exchange Traded Fund or Gold ETF is a kind of mutual fund which deals with gold as its primary asset. These funds are similar to individual stocks and they are listed on the stock exchange.

Gold ETFs invest in physical gold that is held in secure vaults on behalf of investors. Investors purchase ETF units rather than the real metal and upon selling, they are received cash equivalent to the value of the units rather than actual gold. To understand better how the Gold ETF funds works, read the provided segments given below.

Read also: Guide to Investing in Gold ETF

Gold ETF investment also help in risk diversification. Instead of putting all your money into stocks or real estate, gold can help create a balanced portfolio. But how does a Gold ETF work? Gold ETF funds can easily be bought or sold using a Demat account. All in all, gold ETFs are a prudent, risk-free investment in long-term savings and economic security.

How Gold ETF Works in India?

Gold ETF investment works in the same manner as other ETFs, with gold as the underlying asset: 

• The fund house purchases physical gold and issues Gold ETF units against it.
• A Gold ETF lets you invest in gold without owning it physically.
• Gold ETF units are listed and traded on stock exchanges like NSE and BSE.
• These units can be bought and sold just like equity shares.
• Gold ETF holdings are stored securely in your Demat account.
• When gold prices rise, the value of Gold ETF units generally increases.
• When gold prices fall, the value of Gold ETF units typically declines.
• Small price variations may occur due to demand–supply gaps, tracking error, and expense ratio.

Gold ETF vs Physical Gold

The major differences between Gold ETF and Physical Gold are provided below:

What are the Gold ETF Pros and Cons in India?

Following are the main pros and cons of Gold ETF that are necessary for any investor to know before investment.

Pros of Gold ETF:

• Physical storage is not necessary – No locker, no possibility of theft.
• Easy to purchase and sell – Gold ETFs are listed on NSE/BSE.
• Pure gold exposure – Every unit is backed by gold.
• High liquidity – It can be sold at any time of the day.
• Less expensive – No making charges or storage costs.
• Safe investment – It is regulated by SEBI.
• Good hedge – Protection of money in times of inflation and recession.

Cons of Gold ETF:

• Demat account required- Not possible to make an investment without it.
• No physical use – It cannot be used as jewellery or gifts.
• Market-linked prices – Their value declines when gold prices fall.
• Expense ratio – A small annual fee is applied to manage funds.
• Tracking error – The price of an ETF can be slightly below the price of gold.
• No interest or dividends – Returns are dependent on the gold price.

How to buy Gold ETFs in India?

Gold ETFs can be purchased and sold in the secondary market through stock exchanges such as NSE and BSE by retail investors. The primary market is accessible only to authorised participants and large institutional investors, not ordinary retail investors. Gold ETFs in the primary market are acquired directly with the asset management company (AMC) in big fixed lots, usually by big traders. A Gold ETF is a financial instrument that represents physical gold and this explains what is Gold ETFs and how it works for investors. Gold ETFs are mainly traded in the secondary market on stock exchanges such as NSE and BSE among ordinary investors. Even a single unit can be traded with the help of your demat trading account.

To sell units of a Gold ETF, you place a sell order by specifying the quantity of units and the price. A market order sells the ETF at the prevailing market price. Limit order sells only at a certain price which is determined by the investors. In case the limit price is not reached, the order is cancelled. Once sold, the ETF units are debited from your demat account, and the sale proceeds are credited to your linked bank account, similar to equity shares.

Steps to buy Gold ETFs in India

If you are interested in how to buy Gold ETFs in India or how you can buy one online, this section will explain everything.

STEP 1: The first step, the most important step is to open an online Trading and Demat account with a registered stockbroker.

STEP 2: Log in to the trading platform

STEP 3: Select a Gold ETF

STEP 4: Then place a buy order for a certain number of Gold ETF units. 

STEP 5: A confirmation message will be forwarded to your Phone or Email Address.

STEP 6: Funds are debited from your linked bank account.

Gold ETF Tax & Regulations in India

The following is the available information about taxation and government regulation of Gold ETFs in India. Gold ETF Tax India:

• When you sell a gold ETF – Tax Applies.
• Purchasing Gold ETFs is not subject to tax.
• You are only charged tax when you sell/exit and make a profit. 

A) Short-term capital gains (STCG)

• When you sell a Gold ETF within 12 months after purchasing it, the gain is classified as a short-term gain.
• This profit is included in your overall income and is taxed at your income tax slab rate (e.g., 5%, 20% 30% etc.). 

B) Long-Term Capital Gains (LTCG)

• To the extent that you sell a Gold ETF after 12 months, the gain is considered a long-term capital gain.
• Taxed at 12.5% without indexation 

C) No Extra Benefits

• No tax exemption on Gold ETFs up to ₹1.25 lakh (as compared to equity funds). 
• Sell within 1 year – taxed at your slab rate (STCG).
• Sell after 1 year – Taxed at 12.5% flat (LTCG).
• Tax is imposed on profits when selling.  

What Type of Investor is Suitable for a Gold ETF?

Gold ETFs could be attractive to investors who would want to allocate a part of their investment portfolio to gold because they tend to be more convenient in comparison with physical gold. Top Gold ETFs India are easy to invest in, whereas in most Indian families, it is always preferred in its physical form. But Gold ETFs can be regarded as a safe investment option for both the market and safety in the future needs.

Conclusion

Gold ETFs are ideal for investors who wish to invest in gold conveniently while diversifying their portfolios. They provide an easy way to invest in gold without worrying about the safety and purity of the metal. Gold ETF investments can be made entirely online through stock exchanges, eliminating the need to visit physical locations. Financial experts generally recommend allocating around 10 per cent of the overall portfolio to gold, in addition to proper investments in debt and equity. 

Frequently Asked Questions (FAQs)

Is a Gold ETF a good option?

Gold ETFs can be a good investment in gold. These funds are passively managed and backed primarily by physical gold. They are traded on the NSE and BSE during market hours, similar to ordinary stocks.

How to buy 1 gram of Gold in an ETF?

The amount of gold you need to purchase to gain 1 gram of gold through an ETF is 1 unit and it normally corresponds to 1 gram. Through a stockbroker or fund manager, you can easily buy or sell.

How Does a Gold ETF Work?

A gold ETF is a fund that primarily invests in physical gold of high purity, which is stored securely by the fund on behalf of investors. It comes after the gold price in the domestic market. It issues shares which can be traded in the stock exchange within the market hours.

Are Gold ETFs a Risky Investment?

Gold ETFs are associated with risks just like any other investment. The price of the ETFs can be influenced by the changes in the underlying asset price, market volatility and currency variations.