Recent regulatory changes have made gold investments through the mutual fund route more complicated for Indian investors. Earlier this month, mutual fund houses offering gold fund-of-funds products issued notifications about stopping further investments. Many investors who used these simple plans now face hurdles as new lumpsum investments got stopped.
Until recently, Indian investors looking to own gold as a portfolio hedge, could do it pretty simply. They could directly buy gold ETFs (exchange traded funds) on the stock exchanges. If they didn’t have demat accounts, they could invest in gold fund-of-funds (FoF), which would redirect the money into gold ETFs. Investors could also set up systematic investment plans (SIPs) in gold funds.
However, recent regulatory changes have made gold investments through the mutual fund route more complicated for investors. We explain why and tell you how to get around this.
Why ETFs/gold funds
Owning gold in the mutual fund form has distinct advantages over holding it in jewellery, bar or coin form. One, in India, jewellery, bars and coins bought from jewellers suffer from pervasive quality issues. The physical gold you buy is seldom of the stated caratage; you have no way of verifying it. Two, you pay stiff mark-ups over the prevailing market price of gold towards making charges, stone charges and so on. Three, jewellery, bars and coins are not easily resaleable. Jewellers encourage you to exchange old gold for new. If they do buy back your gold, you take a haircut on the value towards wastage and losses. All this apart, holding gold in physical form also entails additional costs for safe-keeping, such as bank locker charges and insurance.
Gold ETFs and FoF help investors neatly side-step these problems. Gold funds and ETFs can be bought or sold at the prevailing NAV/market price from the fund house or the exchange. You needn’t worry about the quality issues as Securities Exchange Board of India (SEBI), the regulator for mutual funds and ETFs, has stringent rules around this.
Gold ETF units are required to be backed by standard gold of 99.5 per cent purity. The gold can be stored only in designated vaults operated by registered vault managers. The holdings are physically verified and certified by independent auditors. These features make ETFs and gold funds an ideal way to own gold to hedge one’s stock portfolio or save towards future gold purchases. However, recent regulatory changes have made it tougher for investors to own gold through this route.
Fund route closed
Earlier this month, mutual fund houses offering gold FoF products issued notifications about stopping further investments in these funds. All new lumpsum investments, switch-ins and new registrations for SIPs or systematic transfers into these funds have been stopped, effective October 16, 2026. SIPs registered before October 16 would be allowed to continue. Gold ETFs remain free of such restrictions, so if you own a demat account, you can switch to buying gold ETFs directly from the exchanges.
The shuttered FoF have two implications for investors. If you don’t own a demat account, you can no longer buy gold in paperless form. If you are already running SIPs or STPs (systematic transfer plans) in these FoFs, you won’t be able to add to your SIP amounts.
For such investors, the best bet is to open a demat account and buy gold ETFs. Buying digital gold from private entities is not the most preferred route, as it is not regulated. You could buy bars or coins from PSU-backed entities like MMTC PAMP or from the few banks that allow retail bullion sales. But you sacrifice liquidity, as they don’t offer buybacks. Storage and safekeeping costs fall on you.
Checks on ETFs
However, there are a few checks to run before you dive into gold through the ETF route.
One, the SIP route is not available when you buy ETF units directly on the exchanges. Therefore, you need to go back to tracking gold prices closely and investing lumpsums in ETFs when prices fall.
Two, unlike gold funds which were bought at NAV, ETF units can be bought only at their traded price on the exchanges. The traded prices of ETFs are volatile and can vary a lot from the underlying NAV. During periods of exceptional demand, prices for some ETFs have been known to climb to a 7-8 per cent premium. Buying ETFs at a premium eats directly into your returns. Therefore, while punching in a buy order for a gold ETF, you first need to check its official NAV. The official NAV of an ETF is published with a day’s lag, and can fail to capture gold price moves overnight. Therefore, fund houses publish an ‘indicative NAV’ or ‘iNAV’ which can be used to know the true value of an ETF. While buying into a gold ETF, be sure to check its iNAV. If the traded price is at a discount to the NAV or at it, you can go ahead and buy. Else it is best to postpone your trade or create a limit order. The iNAV is available on the NSE website when you click on the ticker for the ETF.
Three, when screening for gold ETFs, many investors make the mistake of choosing the ones trading at the cheapest price. Checking today for instance, you find that Nippon Goldbees trades at ₹115.9 per unit, ICICI Pru Gold ETF at ₹119.9 and Zerodha Goldcase at ₹22. This doesn’t automatically make Zerodha Goldcase a cheaper way to buy gold. Both Nippon Goldbees and ICICI Pru Gold ETF offer exposure to 0.01 gram of gold per unit. Nippon Goldbees trades at a lower price because it is a longer running ETF. Its NAV has seen the impact of annual fees charged over many years and that’s why it trades cheaper. The unit of gold underlying the ETF also makes a difference. Each unit of Zerodha Goldcase represents 0.001587 gram of gold, while the other ETFs represent 0.01 gram of gold.
Four, when choosing gold ETFs, pay attention to their underlying liquidity. Some gold ETFs are actively traded and can absorb healthy volume of buying or selling at your preferred price. But some gold ETFs are less liquid. On October 23, for instance, Nippon Goldbees saw ₹328 crore of traded value and ICICI Pru Gold ETF managed ₹70 crore. But there were gold ETFs such as Union, Choice, Baroda BNP which saw less than ₹10 lakh in transaction volumes. When verifying liquidity, it is necessary to check for consistency of trading volumes over a month or year rather than go by one-day data. NSE pages on individual ETFs allow you to do this.
Finally, while the ETF route is currently a good alternative to physical gold, this can change. Earlier this year, enabling provisions were brought in to allow gold ETFs to back upto 50 per cent of their NAV with gold derivatives, gold deposit receipts and government-backed receipts for gold monetisation. Recently, RBI is said to have proposed that gold ETFs own exchange-issued electronic gold receipts instead of physical gold.
Gold ETFs have so far not used these provisions and remain invested to the extent of 98 per cent plus in physical gold. However, if they do make the transition from being fully backed by physical gold, to owning paper gold, investors may need to rethink the utility of gold ETFs as the ultimate portfolio hedge.
The author is a Contributing Editor
Mind It
SIP route is not available when you buy ETF units directly on the exchanges
While punching in a buy order for a gold ETF, you first need to check its official NAV
When screening for gold ETFs, many investors make the mistake of choosing the ones trading at the cheapest price