All that’s glittering is gold ETFs. But is it safe to invest in them?

In 1848, john Sutter was building a water-powered sawmill in California when he saw flakes of gold on a streambed. The news spread like wildfire and resulted in the famous Californian gold rush. Though roughly $2 billion worth of gold was mined in the region over the next couple of years, few prospectors made it rich due to the high cost of mining and harsh conditions. India has been seeing its mini gold rush for the last few years but with a difference—investors here have been making loads of money. Gold has outperformed every other asset class in India over the past year, burnishing its reputation as a storehouse of wealth for investors even as geopolitical tensions and economic worries roil financial markets. The price of the precious metal surged 33.3% in 12 months to Rs 87,447 per 10 grams on March 24, 2025, from Rs 65,600 a year ago, eclipsing benchmark equity indices, which rose nearly 6% during the period. The flight to the safety of gold was triggered by Donald Trump’s election as US President and his threats to slap punitive tariffs on imports from the country’s biggest trading partners, including India, the war in Ukraine and tensions in the Middle East. A strong American dollar and the rupee’s weakness amid a flight of foreign investors—plus purchases by central banks—also enhanced the metal’s role as a key part of investor holdings in a country where it has always been prized by households as the best hedge against inflation. International investment houses, including Goldman Sachs and UBS Group AG, are bullish on gold. Goldman Sachs recently raised its end-2025 forecast for gold price to $3,100 per ounce (28.35 grams), up from $2,890, citing strong central bank demand as a key factor. UBS increased its year-end target to $2,900 per ounce, citing investor sentiment amid macroeconomic uncertainties. It has already crossed the target and was above $3,000 on March 24. Effect on Gold ETFs The rising demand for gold has delivered a shot in the arm to gold ETFs, which invest in bullion and mimic the price of physical gold, allowing investors to gain exposure to the precious metal. Gold ETFs primarily invest in physical gold and even gold companies. They offer a way for investors to gain exposure to gold prices without the need for physical storage or security concerns. The numbers speak for themselves. According to the Association of Mutual Funds in India (AMFI), gold ETFs attracted investments worth Rs 14,929 crore in the first 11 months of FY25 until February, more than double the Rs 5,248 crore in FY24. The total assets under management of gold ETFs stood at Rs 55,677 crore on February 28, 2025. Investors seeking stability amid volatility in equity markets and a hedge against economic uncertainty are turning to gold ETFs as a convenient and effective way to gain exposure to the precious metal, say experts. “They offer liquidity, allowing easy buying and selling without the need to store or insure physical gold,” says Raghav Iyengar, Chief Executive Officer of wealth management firm 360 ONE Asset. “ETFs have lower costs related to storage and transactions, making them a cost-effective option compared to owning physical gold,” says Iyengar. Investors, central banks, and financial institutions prefer gold as an asset class because it is one of the most liquid assets, says Vikram Dhawan, Head of Commodities and Fund Manager at Nippon India Mutual Fund India. Gold ETFs are far superior to other investment vehicles and sovereign gold bonds because they are fully backed by physical gold bars of high quality that conform to global standards, says Dhawan. Their ease of accumulation, safety, and convenience make them attractive. Physical gold backing the ETFs are stored in high-security vaults. Gold ETF units are traded on stock exchanges, offering liquidity and transparency. The ETFs are regulated by the Securities and Exchange Board of India, assuring investors of protection. Alternatives to ETFs To be sure, investors also have other ways of taking exposure to gold: for instance, they can buy digital gold on online apps and have gold equivalent to the money spent stored in digital accounts by the service provider. And then there are gold funds, or gold fund of funds (FoFs), MFs that invest in gold ETF units; they offer systematic investment plans as well. An investor can redeem or sell holdings any time, but these are not traded on exchanges. An investor, though, has to pay 3% goods and services tax on digital gold purchases. The sales are subject to capital gains taxes. While both gold funds and gold FoFs offer exposure to gold, the former invest directly in gold ETFs and the latter in a portfolio of gold ETFs. Gold ETFs provide a convenient and efficient way for investors to gain exposure to gold. They offer liquidity, allowing easy buying and selling without the need to store or insure physical gold -Raghav Iyengar, CEO,360 One Asset Management In a nutshell, gold ETFs provide direct exposure to gold prices, digital gold offers a way of owning a small fraction of physical gold, and gold funds and gold FoFs invest in gold ETFs. Each option offers a different method of investing in gold; they come with varying levels of risk, liquidity, and expenses. Gold ETFs and FoFs offer mutual fund units and are therefore regulated products. Digital gold products are unregulated, relatively less transparent in pricing and involve counterparty risks, says Vishal Jain, CEO, Zerodha Fund House. Gold ETFs are passive instruments backed by high-purity gold and offer returns that closely track the price of physical gold, says Sugandha Sachdeva, the founder of wealth management firm SS WealthStreet. The investment instrument is highly liquid and provide investors the flexibility of gaining exposure to gold gradually in small quantities without the hassle of storing gold. “Gold ETFs can be traded on both the exchanges like stocks, offer transparent pricing, provide easy entry and exit and can be held in demat accounts. However, while selling, investors don’t get physical gold but cash equivalent,” she says. The flip side To select the right gold ETF, investors should consider expense ratio, liquidity, trading volumes and tracking error to ensure the ETF closely mirrors gold price movements. They should also consider the reputation of the fund house and operational efficiency. Mirae Asset’s Sachdeva says that unlike physical gold, ETFs do not provide direct access to gold and the price of ETF units is prone to market volatility from demand-supply dynamics even if gold prices remain stable. Typically, when gold ETFs are launched, one unit reflects .01 gm of gold. Over time, total expense ratio charged by the fund and tracking error result in a difference between the net asset value (NAV) and the gold price -Siddharth Srivastava,Head of ETG Product &amp; Fund Manager, Mirae Asset Investment Managers (India) “Also, asset management fee, often 0.4-1%, may reduce returns. Investors also have to pay brokerage and demat charges. The gap between buying and selling prices can impact returns, especially if liquidity is low. Investing in gold ETFs requires a demat account, adding cost and a layer of complexity,” she adds. Why Different NAVs Different gold ETFs have different net asset values (NAVs), which largely depend on the fraction of gold represented by a unit, cash, debt or equivalents held by the fund for liquidity management, and expenses like management fees, operational costs and other deductions. Total Expense Ratio—the percentage of assets that a fund sets apart to cover costs—for investors includes brokerage and goods and services tax, similar to charges incurred while buying and selling stocks in the securities market. Gold ETFs do not attract securities transaction tax. Iyengar of 360 One says to calculate the gold weight held in a gold ETF, one first needs to know the current price of gold and the NAV of the investment. If the price of gold is Rs 8,000 per gram and the NAV of a gold ETF is Rs 80, you can calculate the gold weight held per share by dividing the NAV by the price of gold. In this case, Rs 80 divided by Rs 8,000 equals 0.01 grams of gold per share. To find the total weight of gold you own, multiply the gold weight per share by the number of shares you hold. For example, if you own 100 shares, the total gold weight would be 0.01 grams x 100 units—one gram of gold. This calculation provides you an estimate of the total amount of gold based on the ETF’s NAV and the current gold price. Typically, when gold ETFs are launched, one unit reflects .01 gram of gold, says Siddharth Srivastava, Head of ETF Products &amp; Fund Manager at Mirae Asset Mutual Fund. Over time, the TER charged by the fund tracks the difference between the NAV and the gold price. For example, if in one year, gold has given a return of 20% and the ETF TER is 0.50%, the ETF return will be around 19.50%. “Over a period, this builds up, leading to a difference in the price of an ETF unit and the price of physical gold,” says Srivastava. The best way is to not focus on the NAV but on the transaction and holding cost and how well the ETF tracks gold prices, because irrespective of the unit price, the returns will correspond to a change in the price of gold adjusted for cost and other factors, he says. Gold Vs Silver A comparison between gold and silver is no more like that between apples and oranges. Silver, which is also an industrial commodity, has seen a sharp rise in demand due to its applications in renewable and industries like solar energy, electric vehicles, and high-tech electronics. That is why silver ETFs offer an indirect play on renewable energy and tech sectors, making them a higher beta alternative—implying higher risk but also higher returns—to gold. Both commodities can co-exist in a portfolio for long-term growth. Srivastava of Mirae says silver ETF is a good investment. Even so, one must buy silver ETFs to complement the portfolio and not as an alternative to gold ETFs. Jain of Zerodha Fund House says silver and gold ETFs should not be looked at as mutually exclusive and hence should co-exist in an investment portfolio. Gold, being a safe-haven commodity, protects your portfolio because it has a low correlation to equities. Despite its stellar gain in the past year of turbulence, gold remains under-owned by global investors and, as a consequence, there is a strong likelihood of significant inflows into global gold ETFs in 2025, says Dhawan of Nippon. “While high prices may temporarily dampen physical demand, increased investment interest could offset some of this weakness. The key driver of the ongoing bull run is central bank buying, which is expected to remain robust in the foreseeable future, ” he says. @apex_pawan

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All that’s glittering is gold ETFs. But is it safe to invest in them?

Gold ETFs attracted Rs 14,929 crore in the first 11 months of FY25, more than double the Rs 5,248 crore logged in the previous financial year. is it a safe option?