Gold ETFs Explained
Exchange-traded gold: how the units work, what the expense ratio and tracking error cost you, and how they compare to SGBs.
A gold ETF is a mutual fund scheme that holds physical gold and trades on the stock exchange like a share. One unit typically represents a defined quantity of gold.
How it works
The fund buys and vaults physical gold of specified purity. Units are listed and trade through the day at prices that track the underlying gold value. You need a demat and trading account to buy them.
Costs to look at
- Expense ratio. The annual management fee, deducted from the fund. Gold ETFs are generally low-cost, but compare across funds.
- Tracking error. How closely the fund follows gold. Lower is better.
- Brokerage and bid-ask spread. Thinly traded ETFs can have wide spreads that quietly cost more than the expense ratio.
Advantages
- SEBI-regulated, with transparent holdings and daily NAV.
- No making charges, no storage, no purity risk.
- Highly liquid during market hours, in small quantities.
- Suitable for systematic accumulation.
Limitations
- Requires a demat account, with its own annual charges.
- No interest income, unlike SGBs.
- You cannot wear it, and physical redemption is generally not available to retail investors in small lots.
- Only tradable when the market is open.
Gold funds (fund-of-funds)
If you do not have a demat account, gold fund-of-funds invest in a gold ETF and can be bought like any mutual fund, including via SIP. There is an extra layer of cost, but the access is simpler.
Comparison at a glance
- Lowest cost for a long hold with a coupon: SGBs, where available.
- Best liquidity and flexibility: ETFs.
- Easiest access without demat: gold fund-of-funds.
- Physical possession: coins and bars.
Educational content, not investment advice.
Disclaimer: Rates are indicative and may vary based on market conditions, local premiums, taxes, jewellery making charges and other applicable charges.