Gold ETF

Physical gold is hard to hold well — storage, purity checks, making charges on jewellery, and the difficulty of selling a small amount when you only need a little cash. A Gold ETF removes all four problems by holding the gold for you and trading a claim on it on the stock exchange.

The workbook's own words: "Gold ETFs have gold as the underlying asset so as to provide investment returns that, closely track the performance of domestic prices of gold." As with any Exchange Traded Fund, units are listed and traded on the exchange, priced in real time, rather than bought and sold at an end-of-day NAV.

The mechanics that make a Gold ETF a claim on real, held gold:

• Each ETF unit typically represents one gram of gold.
• For every unit issued, the fund holds gold in the form of physical gold of 99.5 percent purity, or gold receipts.
• The fund is also allowed to invest in the gold deposit schemes of banks, up to a limit of 20 percent of the net assets of the scheme — so not all of the backing gold need sit as bullion in a vault.
• The custodian of the fund is responsible for the safekeeping of these assets.
• Because the ETF holds gold rather than trying to beat its price, the actual return can be lower than the market return on gold itself, due to the fund management expense charged and any cash holdings the fund carries.

As an ETF, it follows the general mechanics the workbook sets out for the category: first offered in a New Fund Offer (NFO) like other mutual funds, units credited to the investor's demat account, and thereafter bought and sold on the stock exchange through brokers or trading portals, settled like a stock trade — not redeemed with the AMC at end-of-day NAV the way a conventional mutual fund unit is.

Where it sits among ways to hold gold. The workbook also describes Sovereign Gold Bonds (government paper, 8-year tenor, bonds denominated in grams of gold, discontinued from FY 2024-25), digital gold (bought from private sellers, not itself a regulator-supervised product) and physical gold/jewellery. Gold funds (mutual funds that in turn invest in Gold ETFs) are a related, non-exchange-traded way to get the same exposure, typically with a minimum initial investment around Rs 5,000.

Ms Anjali Rao wants Rs 1,00,000 of exposure to gold as part of her retirement portfolio's diversification, without storing bullion at home.

She buys Gold ETF units on the exchange. Because each unit tracks roughly one gram of gold, and gold trades around, say, Rs 7,000 a gram, her Rs 1,00,000 buys roughly 14 units (before costs). She can sell even a single unit on the exchange if she needs a small amount of cash — something that is far harder to do cleanly with a gold coin or jewellery, where making charges and wastage deductions eat into the amount realised on a partial sale.

Over time, her actual return trails the pure rise in the domestic gold price slightly, because the fund's management expense and any cash it holds are not themselves earning gold's return.

Chapter 2 (Financial Markets & Investment Products) defines Gold ETFs in the mutual fund product list, immediately after the general ETF description; Chapter 6 (Retirement Planning Products: Other Investment Products) returns to gold as an asset class and compares Gold ETFs with physical gold, digital gold and Sovereign Gold Bonds for suitability in retirement planning. Expect a question on the 99.5% purity figure, the 20% cap on gold deposit scheme investment, and a comparison question distinguishing a Gold ETF from physical gold or an SGB on liquidity and backing.

• 99.5% is the purity of the physical gold or gold receipts backing the fund — not a return figure, and not a purity requirement on what the investor receives (investors hold units, not gold itself, unless they redeem in bulk through the fund's own creation/redemption mechanism).
• The 20% limit is on investment in banks' gold deposit schemes, not a cap on the ETF's overall gold backing — up to that 20%, the "backing" is a bank deposit denominated in gold rather than bullion in a vault.
• A Gold ETF trades on the exchange in real time; a conventional gold fund (which invests in Gold ETFs) is bought and sold at end-of-day NAV like any other mutual fund — do not treat the two as identical in how they are transacted.
• Actual ETF returns can lag the pure gold price because of fund expenses and cash holdings — an investor expecting an exact one-to-one tracking of the gold price may be surprised by a small gap.
• Sovereign Gold Bonds paid 2.5% p.a. interest in addition to gold-price appreciation, but a Gold ETF pays no such interest — its return is entirely from the price of gold, minus expenses. SGBs have also been discontinued from FY 2024-25, per the workbook.
• Series X-B's chapter 12 contradicts itself on the holding period, and the 12-month test is the one to answer. Its page 287 says a gold ETF held for more than 12 months gives a long-term gain, taxed at 12.50% plus surcharge and cess. The worked example on the very next page then labels a gain long-term because the units were held for more than 36 months. The 36-month wording is a leftover from the pre-2023 rule, and the same passage explains why it still appears: units bought after 1 April 2023 and sold before 1 April 2025 are always treated as short-term. If a question quotes 36 months, it is quoting the stale label.