Gold ETF

What is a Gold ETF?

A gold exchange-traded fund (ETF) is a unique investment product that tracks the price of physical gold. It is a type of mutual fund where the money of different investors is pooled together and is used to purchase gold. 

However, unlike traditional mutual funds, the units of a gold ETF are listed on stock exchanges and traded during market hours. You can freely buy and sell gold ETFs on exchanges, similar to stocks, using an electronic trading account. Each unit of a gold ETF represents 1 gram of physical gold of the highest purity (99.5%), which is stored safely in high-security vaults.

One of the primary features of this type of fund is that it provides exposure to gold without any of its drawbacks such as storage or purity concerns. A gold ETF is a passive investment that aims to reflect the price movement of gold. The performance of the fund moves in tune with global gold prices, increasing in value when the price of the precious metal goes up and vice versa.

How Do Gold ETFs Work?

If you wish to invest in the best gold funds, understanding how they work is crucial. Here is a hypothetical example of how these investment products operate.

Assume you wish to invest ₹14,000 in a top gold ETF. You can simply purchase the units of the fund through a stock exchange using your stockbroker’s trading account. Suppose the price of one unit of the ETF is ₹7,000, you can purchase two units. 

Now, as the market price of gold changes, the value of your ETF units will also fluctuate accordingly. For example, the value of your investment will increase when global prices rise and decrease when global prices fall. 

If you wish to liquidate your gold ETF investment, you can simply sell your units on the stock exchange during market hours, just like stocks. 

Compared to other mutual fund investments, gold ETFs do not require any active management by the fund manager. In fact, these funds are passively managed. Due to this, the expenses associated with gold exchange-traded funds are much lower than actively managed funds and sometimes even lower than physical gold.

Benefits of Investing in Gold ETFs

A gold ETF in India offers numerous advantages over traditional gold investment. If you are considering investing in top gold ETF funds, here are some of the key benefits you will get to enjoy. 

1. High Liquidity: Since gold ETFs are traded on exchanges, they are highly liquid investments. Unlike physical gold, you can quickly buy or sell units electronically during market hours. 
2. Cost-Effectiveness: Some of the best gold ETFs have very low expense ratios, making them far more cost-effective and affordable compared to physical gold investments.
3. Transparency: Gold ETFs reflect the price of gold in real time, allowing you to track the value of your investments easily. Additionally, there is also complete transparency with respect to a fund’s holdings, which are declared and updated by the fund house at regular intervals.
4. Security: Each unit of a gold ETF is backed by physical gold of high purity (99.5%). The physical gold is stored in the form of bars in high-security vaults owned and managed by custodian banks.
5. Diversification: Investing in top gold ETFs is a good way to diversify an investment portfolio. Since gold is a non-correlated asset, these funds enable you to effectively reduce your overall investment risk.
6. Hedge Against Inflation: Gold is widely known for retaining value even during periods of high inflation. By investing in gold exchange-traded funds, you can capitalise on this advantage.

Who Should Invest in Gold ETFs?

Gold ETFs are ideal investment options for a wide range of investors. Here is an overview of who can consider investing in these funds. 

1. Risk-Averse Investors: For conservative investors with a low tolerance for market risk and volatility, investing in some of the top gold ETF funds could be the right way to go. Gold is a resilient asset that has held its value well even during periods of economic downturns, making it ideal for risk-averse investors. 
2. Diversification-Seeking Investors: Investors with portfolios that have significant equity market exposure can also consider investing in some of the best gold ETFs in India. Since gold has an inverse correlation with stocks, including gold ETFs in the portfolio can effectively offset equity market risks.
3. Long-Term Investors: Gold exchange-traded funds are ideal investments for investors with a long-term investment horizon. Gold is a good hedge against inflation and currency depreciation, and including it in an investment portfolio can help protect wealth from eroding.
4. Small-Scale Investors: Unlike physical gold, Gold ETFs are easily accessible and do not require large sums of money to purchase. Small investors with limited investment capital can invest in gold ETFs via a systematic investment plan (SIP) and capitalise on the price movements of the precious metal. 

How to Choose the Right Gold ETF?

With several competent exchange-traded funds tracking gold prices in India, finding a suitable choice may be difficult. However, here are some pointers to help you choose the right gold ETF for your portfolio. 

1. Understand Your Investment Goal: Not every investor has the same financial goal. Evaluate your specific objectives, investment horizon and risk profile to understand if gold exchange-traded funds are suitable for your portfolio. 
2. Research ETF Listings: Explore the different ETF listings on stock exchanges like the NSE and the BSE. You can also use the online trading platform offered by your stock broker to access the gold ETF list in India. 
3. Analyse Fund House Reputation: Choose ETFs from fund houses that have a proven track record of reliable fund management. Reputed fund managers may excel at tracking gold prices accurately and ensuring consistent performance. 
4. Read the ETF Fact Sheet and Prospectus: Visit the fund house’s website to access the fact sheets and prospectuses of the best gold ETFs in India. You can then better understand aspects like the objectives, holdings and expense ratios of these funds. 
5. Compare Various Parameters: Make use of online screeners and comparison tools to see how different gold ETFs in India measure up against one another. Focus on metrics like expense ratios, trading volumes and historical returns to find the best gold funds.

How to Invest in Gold ETFs with Angel One?

Step 1: Log in to Angel One trading account using your mobile number/client ID and password.

Step 2: Select ‘ETF’ on the homepage and choose a gold ETF from the list of ETFs in India. 

Step 3: Tap ‘Buy’ and choose between the one-time investment and SIP option.

Step 4: Enter your desired quantity and price of the ETF, then click ‘Buy’ to place an order.

Gold ETFs vs Stock Investing

Understanding how gold exchange-traded funds compare with stock investments can help you make the right investment decision. Here are a few key differences between these two types of market-linked investment options. 

Risk Factors in Gold ETFs

Despite the various advantages of gold ETFs, they carry certain risks. As an investor, you must know what these risks are before investing. Here is a brief overview of some of the key challenges associated with these funds. 

1. Market Risk: Gold ETFs are linked to global gold prices. Any change in these prices due to demand and supply dynamics, government policies or investor sentiment has the potential to affect the investment value.
   
2. Currency Risk: For investors of gold ETFs in India, the currency exchange rates also influence the returns. For instance, a weakening rupee could potentially amplify returns, whereas a strengthening rupee can reduce the value of your investment.
3. Tracking Error: Although a gold ETF aims to reflect physical gold prices, there may be slight differences in the returns between the two due to fund management fees, operational inefficiencies and transaction costs. This mismatch in returns is known as the tracking error.
4. Economic Factors: Macroeconomic factors like inflation, interest rates and geopolitical events can significantly impact the value of even the best gold ETF in India.

Performance Metrics for Gold ETFs

To compare different gold exchange-traded funds and find the top gold ETFs, it is crucial to evaluate different performance metrics, as outlined below.

1. The best gold ETFs offer not only good returns but also high net returns. This means they are cost-efficient and their management expenses are not steep enough to erode the net gains over time. 
2. Liquidity: Liquidity is also a crucial performance metric because it reflects how easily you can purchase or sell the units in a gold exchange-traded fund. High liquidity and tighter bid-ask spreads can lead to minimal impact on prices when placing orders. 
3. Past Performance: Historical returns may not ensure future performance, but they give you insights into how well a gold ETF has performed compared to gold during different market cycles. Use this metric along with the others discussed here for a holistic view.
4. Fund Size: Larger gold ETFs may typically be stabler and offer more liquidity. The expense ratio may also be lower due to economies of scale. Overall, the larger the fund size, the higher the investor confidence in that exchange-traded fund. 
5. Tracking Error: The tracking error tells you how closely a gold exchange-traded fund tracks gold prices. Since most gold ETFs directly track the price of the precious metal, they have negligent tracking errors. Nevertheless, look into this before investing.

Tax Considerations for Gold ETFs

Union Budget 2024 introduced significant changes in gold ETF taxation. It notified a transition period from April 1, 2023, to March 31, 2025, to help investors make the shift from the old to the new taxation rules. Here is a breakdown of how long-term and short-term capital gains from gold exchange-traded funds were taxed before the transition period and will be taxed during and after that period. 

1. Before the Transition Period:

Profits from gold ETFs held for 36 months or less were considered short-term capital gains (STCG) and taxed at the income tax slab rate applicable. Long-term capital gains, from gold ETFs held for more than 36 months, were taxed at 20% with indexation. 

2. During the Transition Period: 

All profits from gold exchange-traded funds purchased and sold during the transition period will be taxed at the income tax slab rate, no matter what the holding period may have been. 

3. After the Transition Period: 

Profits from gold ETFs held for 12 months or less will be considered short-term capital gains (STCG) and taxed at the income tax slab rate applicable. Long-term capital gains, from gold ETFs held for more than 12 months, will be taxed at 12.50% without indexation. 

Top 5 Gold ETFs Based on 5-Yr CAGR

Note: The top gold ETFs list provided here is as of January 23, 2025. The ETFs have been selected using an expense ratio range of 0.40 to 0.60, and are sorted based on the 1-year return.

1. Axis Gold ETF: This fund tops the gold ETF list in terms of its 1-year returns. Its 5-year compounded annual growth rate is also higher.

Key Metrics: 

• 5-year CAGR: 14.16%
• Market Cap (in Rs. crore): 319.17
2. Aditya BSL Gold ETF: With 5-year returns exceeding 14%, this exchange-traded fund, which also tracks the price of gold in India, is another choice for performance-focused investors. Its 1-month return is the second-best in the list making it one of the top gold ETFs.

Key Metrics: 

• 5-year CAGR: 14.10%
• Market Cap (in Rs. crore): 353.23
3. HDFC Gold Exchange Traded Fund: Issued and managed by HDFC AMC, this gold exchange-traded fund can be a popular choice for investors who prioritise performance. Its expense ratio is however, one of the highest among the other top gold ETFs. 

Key Metrics: 

• 5-year CAGR: 14.08%
• Market Cap (in Rs. crore): 1,906.09
4. Kotak Gold ETF: This is another fund that tracks gold prices in India. Its 5-year CAGR and 1-year returns are decent, making it one of the stable options in the top gold ETFs list. 

Key Metrics: 

• 5-year CAGR: 14.05%
• Market Cap (in Rs. crore): 1,984.14
5. ICICI Prudential Gold ETF: This gold ETF, managed by ICICI Prudential AMC, has the lowest expense ratio among the other gold ETF on the list. This means it offers liquidity and cost efficiency along with consistent performance. 

Key Metrics: 

• 5-year CAGR: 14.02%
• Market Cap (in Rs. crore): 1,905.05