Gold ETF Inflows Surge as Investors Seek Safe-Haven Returns

Why in the News?

Net inflows into Gold ETFs in India recently surged to a record ₹1,16,467 crore, tripling from the previous month, as investors preferred gold-backed instruments over equity-oriented schemes.
The recent surge in Gold ETF inflows reflects heightened safe-haven demand amid macroeconomic uncertainty, strong gold price momentum, and relatively lower equity market returns. In 2025, gold delivered a 70% annual return, significantly outperforming the Nifty 50, which returned approximately 10%.

Understanding Gold Exchange-Traded Funds (ETFs)

A Gold ETF is a commodity-based exchange-traded fund that primarily invests in physical gold bullion as its underlying asset. It allows investors to gain exposure to the price of gold without the necessity of owning or storing the physical metal.

Asset Linkage: One unit of a Gold ETF is typically equivalent to 1 gram of gold and is backed by physical gold of 99.5% purity.
Trading Mechanism: Units are listed and traded on major stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), just like individual company shares.
Transparency: Due to direct gold pricing and mandatory regular audits of physical holdings by statutory auditors, the scheme offers high transparency.

Regulatory Oversight:
- Regulator: Gold ETFs are strictly regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds) Regulations, 1996.
- Custody: The physical gold backing the ETF units is held in the custody of a SEBI-registered custodian bank, ensuring the security of the underlying asset.
Benefits of Gold ETFs:
- Secure Alternative: Offers a safe, electronic alternative to physical gold.
- Liquidity: Can be traded easily on stock exchanges, providing quick access to funds.
- Cost-Effective: Lower management, storage, and transaction costs compared to holding physical gold.
- Portfolio Diversification: Adds a commodity component, reducing overall investment risk.
- Tax Efficiency: More favourable taxation compared to physical gold.
- Market-Linked Returns: Tracks the price of gold, which historically hedges against inflation.
- Transparency: Fund value corresponds to real-time gold prices, ensuring clarity for investors.

What is an Exchange-Traded Fund (ETF)?

An ETF is a basket of investments, including equities, bonds, or commodities, that trades on an exchange like a stock.
Key Characteristics:
- ETFs are low-cost investment options, with lower fees than mutual funds or physical gold.
- They offer liquidity and flexibility, as they can be bought or sold anytime during market hours.
- ETFs allow investors to gain exposure to a diverse asset class in a single product.

Taxation and Funding Pattern (FY 2025-26) of Gold ETF

The tax treatment of Gold ETFs in India is distinct from equity and physical gold, following the latest budget guidelines:

Short-Term Capital Gains (STCG): If units are held for less than or equal to 12 months, the gains are added to the investor’s income and taxed at the applicable income tax slab rate.
Long-Term Capital Gains (LTCG): If held for more than 12 months, gains are taxed at a flat rate of 12.5% without indexation benefits.
Wealth Tax: Gold ETFs are exempt from Wealth Tax, making them more tax-efficient than holding large amounts of physical gold.

Q. In India, which of the following statements about Gold ETFs are correct?
1. They offer high liquidity and ease of trading.
2. They involve no storage or purity risk.
3. They are regulated by SEBI under the Mutual Fund Regulations.
4. They provide guaranteed returns higher than equities.

Select the correct answer using the code below:
(a) 1, 2, and 3 only
(b) 2 and 4 only
(c) 1 and 4 only
(d) All of the above

Answer: (a) 1, 2, and 3 only

Explanation:
Statement 1 – Correct: Gold ETFs are traded on stock exchanges (NSE and BSE) in dematerialised/electronic form, making them highly liquid and easily tradable during market hours.
Statement 2 – Correct: Each unit of a Gold ETF is backed by physical gold of 99.5% purity, removing storage concerns and purity risks associated with physical gold.
Statement 3 – Correct: Gold ETFs are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996, ensuring investor protection and transparency.
Statement 4 – Incorrect: Gold ETFs do not guarantee returns. Their returns are market-linked, based on gold price movements, and may outperform or underperform equities depending on market conditions.