Summary
Despite recent price drops and flattening returns, gold ETFs remain a safe liquid financial instrument for long-term gold exposure in India.
Gold has lost some of its glitter.
The price of gold has fallen from its January peak of ₹1.64 lakh per 10 gm to around ₹1.40 lakh currently. This is bad news for gold Exchange Traded Funds (ETFs) as falling gold prices drag down returns on gold ETFs.
Indeed, domestic gold ETFs saw a net outflow of about ₹725 crore in May, overturning more than a year of strong investor interest. The decline in the number of investor folios between April and May clearly shows that investors are selling off their gold ETF holdings.
This is a complete turnaround from 2025-26, when net inflows surged to ₹68,868 crore, more than double the total inflow of ₹30,213 crore in the past five fiscal years. The popularity of gold ETFs last year was such that in January 2026, net inflows into Indian gold ETFs surpassed equity mutual fund flows for the first time.
Sentiment shifts
The recent cooling-off of interest in gold ETFs can be attributed to two factors.
First, demand for gold—the underlying asset—is more subdued than before. Safe haven demand for gold has reduced with the easing of hostilities in the Strait of Hormuz. Higher import duties have reduced gold imports by India, one of the largest gold consumers in the world. Persistent inflation in the US has set up expectations for rate hikes by year-end; as a result, the dollar has strengthened against major currencies. A stronger dollar makes gold less affordable for emerging economies (especially big gold buyers, India and China), thus pulling down gold demand.
Second, in early May, after Prime Minister Narendra Modi urged people to buy less gold, major Indian mutual funds restricted direct subscriptions and switch-ins into their gold ETFs and fund of funds investing in gold ETFs. Lumpsum investments were limited to ₹25 crore for large investors and ₹10 lakh per investor per month for smaller buyers. The aim was to curtail gold investments by high networth and corporate investors without impacting retail investors and Systematic Investment Plans (SIPs), but unfortunately, overall sentiment has taken a hit.
Return drivers
Returns on gold ETFs depend on gold prices as well as exchange rate movements.
Since gold is priced internationally in US dollars, and India imports most of its gold, an exposure to gold is effectively a dollar exposure. A gold ETF holder benefits from a rise in gold price, as well as a depreciating rupee. Between January 2025 and February 2026, both factors worked to boost ETF returns: the price of gold in dollars went up almost every month, and the rupee depreciated steadily against the dollar.
For ETF holders, 2025 was even better than in 2022, when the Ukraine war and inflation weakened the rupee but did not push up gold prices to the same extent. Unfortunately, this double yield kicker has narrowed in the last two months, as tumbling gold prices and a relatively more stable rupee have flattened ETF returns.
Going forward, the restoration of oil and gas supplies is expected to ease the current account deficit and thereby reduce downward pressures on the rupee. That might not bode well for gold ETF returns in the near term. But in the long term, gold ETFs are emerging as the best all-round option for taking gold exposure in India.
Changing demand
Indians have long had a strong affinity for gold, but an increasing share of that demand has shifted from physical jewellery, bars and coins to digital gold and financial products backed by gold.
The post-pandemic bull run attracted a younger generation of investors to gold ETFs.
According to a Zerodha report, soaring gold prices in 2025 reduced jewellery demand while boosting purchases of coins, bars and ETFs. Rising prices also increased the collateral value of gold, leading to a sharp rise in retail loans against gold.
Thus, high gold prices shifted demand from consumption to investment assets, and gold became a source of credit and liquidity. If gold prices fall, demand is expected to flip in the opposite direction, but the shift will probably be partial. Jewellery demand will pick up, but any dip in ETF demand is likely to be temporary and cyclical.
That’s because investors who have already experienced the diversification and return-boosting properties of gold ETFs would be keen to invest more at discounted values, and each successive round of profit taking will entrench gold ETFs deeper into investor portfolios.
Still the best
Physical gold comes with the challenge of storage and security. Digital gold or e-gold is popular with retail investors for its low minimum investment and ease of investing. However, the digital gold market is unregulated, so if the platform selling e-gold was to vanish or go bankrupt, the entire investment could be at risk.
In November 2025, Securities and Exchange Board of India (Sebi) issued a warning against digital gold products, pointing to the significant counterparty and operational risks of dealing with online trading platforms without regulatory safeguards. Electronic gold receipts (EGR)—available for purchase and trading on BSE as well as the National Stock Exchange—suffer from low trading volumes and illiquidity. Sovereign gold bonds were another popular gold-backed asset, but no issues have been announced in recent months.
That leaves gold ETFs as a safe, convenient and liquid way to take gold exposure.
The author is an independent writer in economics and finance.
About the Author
Deepa Vasudevan
Deepa Vasudevan writes stories about economic systems, policies, and how they impact business and society. She likes to use data to simplify macroeconomics and make it accessible to everyone.
