Festive investment: Are Gold ETFs a better option than physical gold to ride the bullion rally?

For centuries, Indian households have turned to gold jewellery, coins, and silver bars as a way to preserve wealth and provide a financial cushion in times of crisis. That instinct remains strong even today. However, challenges around purity, storage, liquidity, and emotional attachment have often made physical gold less than ideal from an investment perspective.

This festive season, investors are increasingly shifting towards Gold Exchange Traded Funds (ETFs) — a digital and cost-efficient way to gain exposure to gold. With global uncertainties, geopolitical tensions, and inflation concerns keeping bullion in focus, Gold ETFs have become one of the most popular instruments for portfolio diversification.

Why ETFs, not physical gold?

While gold is traditionally seen as a hedge against inflation and currency volatility, physical purchases often come with additional costs such as making charges, purity checks, and storage risks. Gold ETFs, on the other hand, eliminate these hurdles.

“Gold and silver ETFs offer significant advantages over physical holdings across liquidity, cost, purity, tax, and diversification,” Chintan Haria, Principal-Investment Strategy, ICICI Prudential AMC, wrote in a column. “They trade close to market prices, can be sold instantly, and avoid hidden costs like storage and making charges. ETFs are backed by high-purity bullion stored securely, removing concerns about adulteration.”

Gold ETFs are mutual fund schemes that track domestic gold prices. Each unit typically represents one gram of high-purity gold, held in insured vaults. These funds are listed on stock exchanges and can be bought or sold during market hours like shares, ensuring transparency and easy access. Expense ratios are low — generally between 0.30% and 0.80% — making them among the cheapest ways to hold gold.

Price outlook

Global cues remain supportive for bullion. Spot gold is expected to extend its rally towards $3,875 per ounce on the back of a weaker dollar and softer US treasury yields, according to ICICI Securities. Domestically, MCX Gold December futures are projected to rise towards ₹1,17,500 as long as they hold above ₹1,15,200, while silver futures could move towards ₹1,45,500.

“After sharp rallies in recent weeks, some consolidation is likely, but the broader trend remains intact,” said Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities. “Gold could consolidate between ₹1,18,000 and ₹1,14,000, while silver may trade between ₹1.45 lakh and ₹1.35 lakh in the near term.”

Strong track record

The recent performance of Gold ETFs underscores their appeal. Over the past five years, gold ETFs in India have delivered robust returns, making them an attractive option for investors seeking stability and diversification. Among the top performers, LIC MF Gold ETF leads with a five-year CAGR of 14.3%, supported by low tracking error, strong brand recall, and disciplined passive investment in physical gold. 

UTI MF Gold ETF follows closely, with a 13.89% CAGR, distinguished by its large AUM, high liquidity, and minimal tracking error of 0.07. Invesco India Gold ETF has generated 14.09% CAGR, though its higher expense ratio slightly impacts net returns. Axis Gold ETF stands out for its lower volatility (standard deviation of 12.73 vs gold’s 13.32) and a Sharpe ratio of 1.67, indicating better risk-adjusted performance. All four ETFs track gold prices closely, offering investors a transparent, cost-efficient, and liquid way to gain exposure. Over a 5–10 year horizon, these ETFs can enhance portfolio resilience.

Scheme Name             | 1 Year (%) | 3 Years (%) | 5 Years (CAGR %) | AUM (₹ bn) | Expense Ratio (%) | Gold Allocation (%)
—————————————————————————————————————
LIC MF Gold ETF         |    32.06   |    20.40    |       14.30      |    5.27    |       0.41        |        98.15
UTI MF Gold ETF         |    32.40   |    20.18    |       13.89      |   21.56    |       0.48        |        99.11
Invesco India Gold ETF  |    31.97   |    20.04    |       14.09      |    3.16    |       0.55        |        98.43
Axis Gold ETF           |    31.88   |    19.95    |       14.01      |   20.84    |        —          |        98.42

Source: Equitymaster

Year-to-date, top funds have delivered returns of around 66%, riding on the surge in global gold prices. One-year returns have crossed 50%, while three- and five-year annualised gains remain robust at 30% and 16%, respectively. These numbers highlight gold’s resilience during market turbulence and its role as a consistent wealth creator.

Tax and cost benefits

Beyond performance, ETFs score well on tax efficiency. Long-term capital gains from Gold ETFs — applicable after a holding period of 12 months — are taxed at 12.5% without indexation, while short-term gains are taxed at the investor’s slab rate. This makes them more efficient compared to jewellery or coins, where additional costs eat into returns.

Storage and theft risks, a common concern with physical gold, are eliminated since ETFs are backed by bullion held in secure, insured vaults. Investors can also start small — even a single gram — making them suitable for all categories of savers.

Festive season trend

With Diwali and the wedding season approaching, demand for gold typically rises in India. Analysts expect a significant portion of this demand to move towards digital gold products like ETFs and gold mutual funds, especially among younger, urban investors who prefer convenience and transparency.

Haria added: “Physical metal is cumbersome, sometimes inefficient, and not always aligned with financial goals. ETFs bring the same store-of-value and cyclical upside into a structure that is cost-effective, liquid, and transparent. For investors who respect tradition yet want modern efficiency, gold ETFs and silver ETFs are a pragmatic and modern bridge.”

Haria summed up, “Gold ETFs are not just an alternative but a superior option to traditional gold buying. They combine cultural preference for gold with modern investment efficiency.”

This festive season, for those looking to celebrate tradition while also safeguarding wealth, Gold ETFs may well be the shining choice.

Disclaimer: Business Today provides market and personal news for informational purposes only and should not be construed as investment advice. All mutual fund investments are subject to market risks. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.