Gold, one of the world’s oldest assets, continues to capture the imagination of investors in the digital age, now in the form of Gold ETFs.
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The investments in Gold Exchange-Traded Funds (ETFs) in India have skyrocketed, growing 4X to ₹1,256 crore between November 2023 and November 2024. (Source: Association of Mutual Funds in India)
This blog explores what Gold ETFs are, why they are so popular, how they work, their advantages, and what potential investors should keep in mind.
Let’s dive into why Gold ETFs are becoming an essential part of today’s investment portfolios.
What is a Gold ETF?
Gold ETF (Exchange-Traded Fund) is a financial instrument available on stock exchanges. It allows investors to invest in gold indirectly. Instead of purchasing physical gold, investors buy units of the ETF, which is same as the price of physical gold. This provides a simpler and more liquid way to gain exposure to gold, without the challenges of storage or security risks associated with owning physical gold.
Gold ETFs are passively managed mutual funds that invest in standard bullion, closely tracking domestic gold prices. Each unit usually represents 1 gram of high-purity gold (99.5% or higher)y.
To buy or sell Gold ETFs, investors need a demat account, making them a convenient and efficient option.
Gold ETFs have gained popularity for several reasons:
Economic Uncertainty: Geopolitical tensions have heightened demand for gold as a safe-haven asset.
Portfolio Stability: Gold’s ability to retain value during periods of high inflation has attracted investors seeking stability.
Digital Accessibility: The rise of digital investment platforms has made Gold ETFs accessible to a larger audience, especially among tech-savvy younger investors.
Low Entry Barriers: Minimal investment requirements and no need for physical storage have appealed to retail investors.
How Do Gold ETFs Work?
- Gold ETFs collect money from multiple investors.
- The pooled money is used to buy physical gold, which is securely stored in vaults.
- The value of the ETF units depends on the current market price of gold, mirroring its performance.
- Investors can buy or sell ETF units on stock exchanges like the NSE or BSE, just like stocks.
This makes the process highly liquid and straightforward, without the need for dealing with the physical handling of gold.
Market Size and Growth
- The global Gold ETF market’s assets under management (AUM) were approximately $274 billion.
- Total inflows into Gold ETFs for the calendar year 2024 were reported at about ₹7,367 crore, a substantial increase compared to ₹2,919 crore in 2023. This represents a growth of approximately 152% year-on-year.
- The total physical gold held by Indian Gold ETFs increased to 56.6 tonnes as of December 2024, up from 54.5 tonnes a month earlier. This represents a 35% year-on-year growth.
- The Indian Gold ETF market is valued at around ₹44,545 crore (approximately $5.4 billion) with total holdings of about 56.6 tonnes as of December 2024.
- Investments in the instrument between November 2023 and November 2024 quadrupled to ₹1,256 crore, according to AMFI.
Gold ETFs: Inflows in 2023 and 2024
| Month | 2023 (₹ Crores) | 2024 (₹ Crores) |
|---|---|---|
| January | -199.43 | 657.46 |
| February | 165.42 | 997.22 |
| March | -266.57 | 373.36 |
| April | 124.54 | -395.69 |
| May | 103.12 | 827.43 |
| June | 70.32 | 726.16 |
| July | 456.15 | 1,337.35 |
| August | 1,028.06 | 1,611.38 |
| September | 175.29 | 1,232.99 |
| October | 841.23 | 1,961.00 |
| November | 333.37 | 1,256.00 |
| December | 88.31 | Pending |
| Total | 2,919.81 | Pending |
Source: Ace MF
A Compelling Asset Allocation Instrument
Gold has long been considered a hedge against inflation and economic uncertainties. It should be viewed as an asset allocation product rather than solely for returns.
Allocation to gold can form 5–10% of a portfolio at any time.
For small investors, SIPs in gold funds can help mitigate price volatility without the risk of bad timing. Gold funds are mutual fund schemes that invest in Gold ETFs.
Advantages of Investing in Gold ETFs
Cost Efficiency: No making charges or premiums are associated with physical gold. The expense ratio for Gold ETFs typically ranges from 0.5% to 1%, which is relatively low.
Tax Benefits: Gold ETFs are a tax-efficient way to invest in gold, with income treated as long-term capital gains. Additionally, they are exempt from wealth tax, securities transaction tax, VAT, and sales tax.
Accessibility: Investors can start with small amounts, often as low as 0.01 grams of gold, making it easier to gradually build exposure to this asset class.
Hedging Against Inflation: Gold has historically been viewed as a hedge against inflation and economic instability, providing a stabilising effect on an investment portfolio.
Considerations for Investors
While Gold ETFs present numerous advantages, there are also some considerations:
Market Risks: Like any investment linked to market performance, Gold ETFs are subject to price volatility based on global economic conditions and demand for gold.
Redemption Limitations: While investors can sell their ETF units at any time, redeeming them for physical gold typically requires holding at least 1 kg worth of units.
Management Fees: Although lower than many other investment vehicles, management fees still apply and can affect overall returns.
Conclusion
Gold ETFs offer a modern approach to investing in one of the world’s oldest forms of wealth. With a blend of liquidity, cost-effectiveness, and transparency, they are an attractive option for both seasoned and new investors.
As with any investment, potential investors should evaluate their financial goals and risk tolerance before investing in Gold ETFs. When used strategically, they can serve as a valuable addition to a diversified portfolio, providing long-term stability and inflation protection.
