Gold Exchange-Traded Funds

A gold exchange-traded fund, or gold ETF, is an open-ended mutual fund scheme whose units are traded on a stock exchange and whose value is linked mainly to gold. It gives investors exposure to domestic gold prices without requiring them to purchase, test, store or insure physical gold themselves.

How price exposure is created

The fund pools investors' money and invests predominantly in physical gold and permitted gold-related instruments. Under SEBI's scheme-classification framework, a gold ETF must invest at least 95 per cent of its total assets in gold and gold-related instruments.

• Each unit represents a proportionate interest in the scheme's underlying assets; therefore, its net asset value generally changes with the rupee value of those assets.
• Domestic gold valuation reflects international gold prices as translated into rupees and adjusted for relevant domestic market factors and valuation rules.
• Fund-management expenses and operational costs are deducted from scheme assets, so returns need not exactly equal the movement in gold prices.

How investors buy and sell exposure

Retail investors generally buy and sell ETF units through a stock exchange using a trading and demat account, much like listed shares. They receive financial exposure to gold rather than taking direct possession of the metal.

• The exchange price is determined by demand and supply, while the scheme's NAV reflects the value of its underlying portfolio.
• Creation and redemption by authorised participants or market makers help keep the traded price close to NAV.
• Liquidity conditions may cause the market price to trade temporarily above or below NAV.

Benefits and limitations

Gold ETFs convert physical gold investment into a regulated, divisible and tradable financial asset, supporting the financialisation of household savings. However, they do not guarantee returns or perfectly reproduce gold-price movements.

• Investors avoid concerns relating to purity, theft and personal storage of physical gold.
• Brokerage, fund expenses, bid-ask spreads and tracking error can reduce realised returns.
• Investors remain exposed to fluctuations in gold prices, the rupee exchange rate and market liquidity.

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