What is Gold ETF Fund and How to Invest in it?

In today’s digital landscape, you do not have to purchase real gold and keep it. Gold exchange-traded funds (ETFs) have become a popular investment option in India, offering a hassle-free and paperless investing experience.

ICRA Analytics reports that in September 2025, net inflows into gold ETFs increased 578.28% year over year to INR 8,363 crore. Let us understand what is gold ETF, how gold ETFs work and how to invest in gold ETFs in India.

What are Gold Exchange-Traded Funds?

Before proceeding, understanding the gold ETF meaning is crucial. A gold ETF is a type of mutual fund that monitors the price of real gold on the domestic market. Like individual stocks, these funds are traded on stock exchanges and are passive investment options which perform based on the performance of gold prices.

Gold ETFs are a simple method to invest in the precious metal as they essentially reflect ownership of the real metal, which is available in paper or dematerialised form. With the convenience of market-linked returns and liquidity, gold ETFs are one of the best ways to invest in gold. It can also be a better choice for investors looking to diversify their holdings or protect themselves against inflation.

In gold ETFs, you invest in equities that are correlated with the price of gold rather than buying physical gold. Both dematerialised and paper versions of these equities are available for holding.

When you want to invest in these ETFs, you will receive a cash credit equal to the current market price of the gold that your ETF units represent. By doing this, you would be able to profit from gold’s worth without having to handle or keep it physically.

Objectives of Investing in Gold ETFs

Now that you what is gold ETF, you should know what makes investing in this instrument crucial. Here are the objectives of investing in gold ETFs:

1. Diversification

   Although gold ETFs are commodity-based funds, they can also be used as industry ETFs. It is a great way to diversify your investments and gain exposure to a range of industries..

2. Ease of Access

   These funds offer an easier option to participate in the gold business and are comparatively easier to access.

3. Hedging

   The gold ETFs are an alternative to insurance in an investor’s investment portfolio, as they may also be used as hedging protection against a volatile market. For instance, if the price of gold unexpectedly drops, investors can reduce their loss by using short-term exchange-traded funds.

4. Defending Your Investments

   ETFs can be one of the finest defensive assets. Since many investors use bonds to protect their investments against economic swings, they are seen to share the same class qualities as bonds. If major currencies like the dollar decline in value, the price of gold might increase significantly. An individual may be able to profit from the abrupt decline by investing in this asset.

5. Long-Term Investment

   This category of mutual funds is an excellent long-term investment since each unit is equivalent to one gram of 99.5% pure gold. It can work if you choose to invest a huge amount of money or engage in systematic trading.

How Does a Gold ETF Work?

As you have the knowledge of gold exchange traded funds meaning and their purpose, knowing how they work is crucial. The pointers below show how a gold ETF works:

1. Creation of ETF Units

   The mutual fund creates gold ETF units with physical gold as the underlying investment. You can purchase and sell these units on stock markets.

2. Trading ETF Units on Stock Exchanges

   By using a stock trading account to place buy or sell orders for ETF units, you may invest in gold ETF funds. Like a regular stock, the units will be credited to or debited from your Demat account.

3. Changes in ETF Unit Valuation

   Since real gold serves as the underlying investment for ETF units, changes in the value of gold will influence changes in the NAV and price of the gold ETF fund. Demand and supply of both physical gold in the market and gold ETF units on the exchange, and cost, might all cause some fluctuation.

Different Types of Gold ETFs

To understand what is gold ETF in depth, it is pivotal to understand the different types of this asset. The primary categories of gold ETFs are listed below:

1. Physical Gold ETFs

   ETFs for physical gold provide direct investments in gold bullion. Each share of these funds represents a portion of ownership in a gold asset to reflect the price swings of the real gold reserve. Without having to worry about storage or security, investors have exposure to the price of gold.

2. ETFs for Gold Mining

   This category of ETFs focuses on businesses that produce gold through exploration, mining, and refining. Since the performance of the firms is correlated with the price of gold, these ETFs provide exposure to gold indirectly.

3. Inverse Gold ETFs

   Inverse gold ETFs focus on moving against the price of gold. These funds provide a hedge against a weakening gold market and ensure profit when gold prices are down.

4. Leverage Gold ETFs

   Leveraged gold ETFs increase the daily returns of gold. These funds accomplish a multiple of the daily performance of gold through the use of financial derivatives. Due to the leverage, they carry a higher risk of loss even while they have the potential for larger profits.

Benefits of Investing in Gold ETFs

1. Eliminate the Risk of Impurity

   Only officially recognised hallmarked gold with a minimum fineness of 99.5% is used for the underlying physical gold investment. Additionally, unlike when investing in real gold, investors do not have to worry about quality because they receive the investment valuation based on the benchmark.

2. No Entry and Exit Load

   Investing in gold ETFs does not include entry and exit loads. This means you do not have to pay any additional charges for this financial instrument.

3. Collateral Benefits

   Any broker or financial institution allows you to use gold ETFs as collateral when you want a secured loan. Since the entire procedure is significantly faster and takes less time, this approach is more convenient.

4. Price Similarity

   The exchanges trade gold ETFs in real time. Therefore, regardless of regional disparities, you can invest or liquidate the investment at current market prices. When it comes to physical gold, costs might differ between cities or even between jewellers within the same city or region, taking into account fees.

5. Cost Effectiveness

   Investors do not have to pay extra fees for things like quality inspections, minting or manufacturing, or locker fees for the secure storage of gold.

Taxation in Gold ETF

Regardless of how long or short-term your investment is, you will have to pay capital gains tax if you exchange these funds and make a profit.

The long-term capital gains (LTCG) period for gold ETFs is 12 months, and profits are subject to 12.5% taxation without indexation. Furthermore, you now owe 20% in short-term capital gains (STCG) tax on certain financial assets.

Like other market investments, gold exchange-traded funds are liable to this capital gains tax.

Who Should Invest in Gold ETFs?

Since you have the overall knowledge of what is gold ETF, from its purpose to taxation, let us know who should invest in these instruments. Investors who want to track gold prices in real time can consider investing in Gold ETFs.

These funds are well-suited for those looking to benefit from gold price movements without actually owning physical gold. They provide an easy way to gain exposure to the performance and value of real gold in the market.

In recent years, Gold ETFs have outperformed several benchmark stock indices, making them an appealing option for conservative investors. Moreover, with brokerage fees typically ranging between 0.5% and 1%, they are also a cost-effective choice for those aiming to minimise commission expenses.

Final Thought

Understanding what is gold ETF is important since it provides a quick and easy option to invest in gold without having to handle the actual metal. They are the best option for investors who wish to increase their exposure to the precious metal while still having the flexibility and simplicity of trading, since they offer real-time tracking of gold prices.

Download the PL Capital Group – Prabhudas Lilladher application or website and open a Demat account for free to invest in gold ETFs. PL also offers you a range of services from commodity trading to portfolio management services.

Frequently Asked Questions

1. Is buying a gold ETF a good investment strategy?

Yes, buying gold ETFs is a good investment strategy since it has no problems with theft or storage expenses.

2. How many gold ETFs are equal to 1 gram of gold?

1 gram of 24K gold is equivalent to one unit of a Gold ETF. However, since the accurate ratio might change significantly owing to things like tracking inaccuracy and fees, it is preferable to consult the fact sheet of the particular fund.

3. Does a gold ETF pay interest?

No, a gold ETF does not pay interest. The appreciation of the gold price is the only source of profits from a gold ETF, and there is no assurance of interest income. Gold ETFs are susceptible to changes in the market price, in contrast to certain alternative gold investments, such as Sovereign Gold Bonds (SGBs), which provide an annual interest rate.

4. What is the 3:5-10 rule for ETF?

The 3:5-10 rule is a guideline for selecting or assessing ETFs. Three key criteria are used to help determine an ETF’s eligibility. These include a 10% portfolio turnover, a 3% expense ratio cap, and a 5% tracking error cap.

5. Is a gold ETF better than an FD?

It completely depends on your risk tolerance and investment objectives. While FDs offer guaranteed returns, gold may offer higher returns but is more volatile. FDs are fixed-income investments, and gold is a hedge.