A gold exchange-traded fund is a SEBI-regulated mutual fund scheme that holds physical gold and issues units that trade on the stock exchange like a share. One unit typically represents a small, fixed quantity of gold, commonly one gram or a fraction of it, and the unit price tracks the domestic gold price closely.
You get the price exposure of gold without a locker, without making charges and without any question about purity, because the gold backing the scheme is held in vaults by a custodian and is subject to periodic audit.
How buying and selling actually works
You need a demat account and a trading account, exactly as you would for a share. During market hours you place a buy order, the units settle into your demat account, and you can sell them on any trading day at the prevailing market price.
Two costs apply. Brokerage on each trade, which is whatever your broker charges, and the scheme's expense ratio, deducted daily from the fund's assets, typically in the region of 0.4% to 0.8% a year for Indian gold ETFs. The expense ratio is not billed to you separately, it quietly reduces the NAV.
There is also a small tracking difference. Because of expenses and cash held for redemptions, the fund's return is normally a fraction below the pure gold price. This is expected and is not a sign of a bad fund, but a fund with a persistently large tracking difference is worth avoiding.
Gold ETF versus gold fund of funds
Many people conflate these. A gold ETF requires a demat account and is bought on the exchange. A gold fund of funds is a regular mutual fund scheme that invests in a gold ETF, needs no demat account, can be bought directly from the fund house and supports a monthly SIP. It carries the underlying ETF's expense ratio plus its own small layer on top.
If you want to accumulate gold monthly without a broker, the fund of funds is usually the more practical route. If you want the lowest cost and already have a demat account, the ETF wins.
A worked example
Suppose you invest Rs 1,00,000 in a gold ETF where each unit represents one gram and the price per unit is Rs 6,200. You get roughly 16.1 units after brokerage.
If gold rises 12% over the next year, the units are worth about Rs 1,12,000 before costs. Subtract an expense ratio of, say, 0.5%, and roughly Rs 560 is absorbed, leaving about Rs 1,11,440 before tax and exit brokerage.
Compare that with buying 16 grams of 22 carat jewellery. At a making charge of 12% you would have paid roughly Rs 12,000 extra at purchase, and a jeweller buying it back would typically not return those making charges. Gold would need to rise substantially just to reach break-even. That gap is the entire practical case for holding gold in paper form.
How it compares with the alternatives
| Feature | Gold ETF | SGB | Digital gold | Physical gold |
|---|---|---|---|---|
| Regulator | SEBI | RBI and Government of India | Not directly regulated | Not applicable |
| Extra income | None | 2.5% a year | None | None |
| Ongoing cost | Expense ratio of roughly 0.4% to 0.8% | None | Storage free only for a limited period | Locker and insurance |
| Entry cost | Brokerage | None beyond issue price | GST plus a buy-sell spread | Making charges of 8% to 25% |
| Liquidity | Any trading day | Maturity, year 5 exit, or thin exchange market | Sell back to the provider | Sell to a jeweller at a discount |
| Needs demat | Yes, unless using a fund of funds | Optional | No | No |
Tax, and why you must check the current rule
The taxation of gold ETFs and gold funds in India has been changed more than once in recent Budgets, and the treatment can depend on when the units were purchased. Rather than relying on any figure quoted online, confirm the applicable holding period and rate for your purchase date on incometax.gov.in or with a tax adviser before you sell. The general framework is covered under capital gains.
How much gold to hold at all
Gold pays no dividend, no rent and no coupon. Its role in a portfolio is diversification rather than growth: it has historically held value when equity has fallen, which is why a modest allocation, commonly discussed in the 5% to 15% range, is a defensible position rather than a bet. See asset allocation for how that decision fits with everything else, and the gold hub for the full comparison.