Fund manager insights: How to invest in gold and silver ETFs? Kotak MF's Satish Dondapati explains

The strong rally in gold and silver in 2025 has brought precious metals back into the spotlight, not only in jewellery stores but also in investment portfolios.

As prices climbed and headlines started highlighting record highs, many investors began looking for easier, smarter ways to participate in the momentum. That’s where gold and silver ETFs entered the spotlight.

ETFs eliminate concerns about purity, charging, and storage, in contrast to purchasing actual gold or silver. With a few clicks, you can invest in them just like you would in a stock. For many first-time investors, that convenience has been a big attraction.

Dondapati manages multiple funds at Kotak AMC, including prominent offerings such as the Kotak Nifty Financial Services ETF, Kotak Nifty IT ETF, and Kotak Nifty Bank ETF, along with several index funds and thematic ETFs.

Different AMCs may follow slightly different methods to account for premiums, discounts, and other related adjustments while calculating the daily NAV.

Note: As per SEBI guidelines, a Gold ETF’s NAV is calculated by converting the LBMA AM fix price into grams, adjusting for the rupee exchange rate, and adding applicable charges such as octroi, stamp duty, and GST. This results in the landed price of gold. Up to this stage, the calculation is largely the same across all schemes.

An ETF’s price is mainly determined by the price of gold or silver in the international market, such as the LBMA Gold Price. This price is converted into rupees using the USD/INR exchange rate.

Taxes and charges like customs duty and GST are added to arrive at the domestic gold price. The ETF’s NAV reflects this value. During market hours, demand and supply on the exchange can cause the ETF to trade at a small premium or discount to NAV. The creation and redemption mechanism helps keep the ETF price closely aligned with the actual value of gold.  

Tracking error in an ETF refers to the deviation between the ETF’s returns and the returns of its benchmark index.

It arises due to factors such as cash holdings, transaction costs, and rebalancing timing.

Lower tracking error indicates that the ETF is closely replicating its benchmark’s performance.  

AUM does not directly determine an ETF’s price, since the price is driven by the value of its underlying assets.

However, higher AUM generally improves liquidity, reduces bid-ask spreads, and lowers the chances of large premiums or discounts to NAV.

Larger ETFs also tend to have lower expense ratios due to economies of scale.

In contrast, low AUM ETFs may face wider spreads and higher tracking error.  

Gold and Silver ETF prices can move more than the actual metal price, mainly due to demand and supply on the stock exchange. If buying interest is high, ETFs may trade at a premium; if selling pressure increases, they may trade at a discount.

In addition, domestic spot premiums over international prices can increase volatility. Since gold and silver are priced in USD, movements in the USD/INR exchange rate also impact ETF prices.

Because of these factors, ETF prices may fluctuate more than the underlying metal.

There is no fixed minimum amount, but beginners should invest based on their overall asset allocation.

Typically, 15–20% of a portfolio can be allocated to Gold and Silver ETFs. Conservative investors may keep a higher allocation to gold within this limit, while aggressive investors may allocate less to Gold ETFs.

The investment horizon should be long-term rather than short-term. It is also better to invest in a staggered manner instead of making a lump sum investment.  

Investors can sell an ETF anytime during market hours on the stock exchange, just like a regular share.

Most ETFs have good liquidity on the exchange. Even if some ETFs have lower trading volumes, market makers are usually present to provide real-time bid and ask prices, ensuring liquidity.

Large institutional investors can also redeem units directly with the AMC, typically in large amounts (for example, ₹25 crore or more).

Investors should check the real-time NAV and bid-ask spread before placing orders, especially in less liquid ETFs.  

To choose the right ETF, you should look at a few important factors.

First, check the tracking error; a lower tracking error means the ETF closely follows its benchmark.

Second, review the expense ratio, as lower costs help improve long-term returns.

Third, consider liquidity and trading volume, which ensure you can buy or sell easily without a large bid-ask spread.

Also, make sure the ETF matches your investment goal, risk profile, and time horizon before investing.  

Investing in Gold or Silver ETFs involves certain risks. The main risk is price volatility, as gold and silver prices fluctuate due to global economic conditions, interest rates, inflation trends, and geopolitical events.

Currency risk also plays a role since international prices are quoted in USD, and USD/INR movements can impact returns.

In the short term, ETFs may trade at premiums or discounts due to demand and supply, and tracking error or expenses can slightly affect performance.

However, these risks are more relevant for short-term investors. Precious metals are generally considered relatively stable over the long term.

Investors should follow proper asset allocation and limit exposure to precious metals to around 15–20% of their overall portfolio.  

Fees play an important role in long-term ETF returns. The main cost is the expense ratio, which is charged annually and adjusted in the NAV. While the percentage may appear small, over time it can impact overall returns due to compounding.

However, most ETFs are relatively low-cost investment options compared to many other financial products.

By choosing an ETF with a competitive expense ratio and holding it for the long term, investors can still benefit from efficient, transparent, and cost-effective wealth creation.  

ETFs are a simple and convenient investment option for beginners. They offer diversification, as one ETF can provide exposure to a basket of stocks, gold, or other assets.

ETFs are cost-effective, with generally lower expense ratios compared to many mutual funds. They are easy to buy and sell on the stock exchange, just like shares. ETFs are also transparent, as their holdings are regularly disclosed.

Overall, they help beginners start investing in a structured, low-cost, and disciplined manner.  

No, it is very unlikely that you will lose all your money in a Gold or Silver ETF.

These ETFs invest in physical gold or silver, and every unit of a Gold or Silver ETF is backed by actual physical gold or silver held by the fund.

This means the investment is linked to real assets that have value. Prices may fluctuate in the short term, but gold and silver do not become worthless. If you invest for the long term and limit allocation to around 15%–20% of your portfolio.  

The value of an ETF is calculated through its NAV. NAV is the total value of all the underlying assets held by the ETF, minus expenses, divided by the total number of units.

For an Equity ETF, the NAV is based on the market value of the stocks it holds. If the stock prices rise, the ETF’s NAV increases, and if they fall, the NAV decreases.

For a Gold or Silver ETF, the NAV is based on the prevailing price of gold or silver (usually linked to international prices), adjusted for currency movement and applicable charges. The ETF price on the exchange may slightly vary due to demand and supply.