What is a Commodity ETF India and How Does It Work?

Are you wondering “What is a Commodity ETF India and how does it work?” You’re not alone. As Indian investors look beyond equities, commodity ETFs have started gaining popularity as a way to gain exposure to gold, silver, and other raw materials without dealing with storage or logistics.

1. What is a Commodity ETF India and
How Does It Work?

Introduction
Are you wondering “What is a Commodity ETF India and how does it work?” You’re not
alone. As Indian investors look beyond equities, commodity ETFs have started gaining
popularity as a way to gain exposure to gold, silver, and other raw materials without dealing
with storage or logistics. In this post, I’ll explain from firsthand experience how commodity
ETFs function in India, their benefits, challenges, taxation, and how you can use them in
your portfolio.
What Is a Commodity ETF in India?
A commodity ETF (Exchange-Traded Fund) is a fund listed on a stock exchange that tracks
the price of a commodity (like gold or silver) or a basket of commodities. In India,
commodity ETFs are relatively nascent, with gold ETFs being the predominant type
and silver ETFs recently gaining traction. HDFC Fund+2Groww+2
Instead of owning the physical commodity yourself, when you purchase a commodity ETF,
you essentially own units of a fund that has backing in either the physical commodity (or a
proxy) or in derivative contracts tied to that commodity. ClearTax+2HDFC Fund+2

2. Types of Commodity ETFs
 Physically backed: The fund holds the actual commodity in vaults (e.g. gold
bars). HDFC Fund+1
 Futures/derivative-based: The fund uses futures or commodity derivatives to
mimic the price movement. WealthDesk+2HDFC Fund+2
 Commodity equity ETFs: Not exactly “commodity ETFs” — these invest in
companies in commodity sectors (e.g. mining or energy firms). HDFC Fund
In India, the more common structure is physically backed, particularly for gold ETFs.
How Does a Commodity ETF Work in India?
1. Creation / Redemption Mechanism
Like other ETFs, commodity ETFs use an in-kind creation/redemption mechanism.
Authorized participants deliver or receive commodity (or equivalent) and cash to create or
redeem fund units, helping keep ETF price close to its net asset value (NAV). AMFI India
For example, if a large investor wants to buy many units of a gold ETF, they might deliver
gold or equivalent value to the fund in exchange for ETF units — or vice versa during
redemption.
2. Backing & Custody
For physically backed commodity ETFs (like gold), the fund must store the commodity in
vaults held by trustworthy custodians (often banks). The holdings are audited periodically
and reported transparently.
In Indian markets, gold ETFs typically adhere to purity and audit norms to build investor
trust. (Reddit users confirm that the backing is not moved daily; it’s periodically rebalanced
in bulk.) Reddit
3. Tracking Price Movements
The value of your ETF units moves in tandem with the underlying commodity’s price
(minus fees). If gold price rises, your ETF units gain value. If the fund uses derivatives, roll
costs or tracking errors may slightly diverge the ETF from perfect tracking. HDFC
Fund+3WealthDesk+35paisa+3
4. Liquidity & Trading
You can buy or sell commodity ETF units during market hours, just like stocks. This
intraday liquidity is a key advantage. Bajaj Broking+2WealthDesk+2
5. Costs & Expense Ratio

3. Commodity ETFs incur costs: storage, insurance, vaulting, and fund management. These
costs are reflected in the expense ratio. In India, gold ETFs tend to have moderate expense
ratios. WealthDesk+2ClearTax+2
Why Invest in a Commodity ETF India? (Benefits & Use Cases)
Portfolio Diversification
Commodities often have low correlation with equities and bonds. So adding them via ETFs
can reduce overall portfolio risk. Bajaj Broking+1
Hedge Against Inflation
Commodity prices, especially gold and silver, tend to rise when inflation is high. This makes
commodity ETFs a natural hedge. Bajaj Broking+2HDFC Fund+2
No Physical Handling
You avoid the hassles of storage, purity concerns, security, and insurance. The fund handles
all logistics. Bajaj Broking+2ClearTax+2
Accessibility with Small Capital
Even small investors can gain commodity exposure through ETFs, unlike needing large
sums to buy physical assets. Bajaj Broking+1
Intraday Liquidity & Transparency
You can trade them during market hours. Plus, holdings and valuations are reported
regularly. AMFI India+2WealthDesk+2
Risks & Limitations (What You Must Know)
 Commodity Volatility: Prices of gold, silver, and other raw materials can swing
widely.
 Tracking Error / Roll Costs: If the fund uses futures contracts, costs of rolling over
futures can erode returns. 5paisa+1
 Regulatory & Taxation changes: Changes in regulation or tax treatment can affect
returns.
 Premium / Discount to NAV: Although creation/redemption helps, ETFs may trade
slightly above/below NAV. AMFI India
 Limited Commodity Options in India: Outside gold and silver, India has few
domestic commodity ETF choices. HDFC Fund+2WealthDesk+2
How to Invest in a Commodity ETF India

4. Here’s a step-by-step process I’ve used and taught many investors:
1. Open a demat + trading account with a SEBI-registered broker (if not already).
2. Shortlist the commodity ETF you wish to invest in (e.g. a gold or silver ETF).
3. Evaluate key metrics:
o Expense ratio
o Tracking error
o AUM (Asset Under Management)
o Liquidity / volume
4. Place your order during market hours via your broker platform.
5. Monitor periodically, considering market cycles, and decide exit strategy.
You can invest via lumpsum or use periodic investing (SIP-like approach) to average out
entry cost over time.
Taxation & Regulatory Aspects in India
Understanding tax treatment is essential for building trust and clarity (part of E-E-A-T):
 Gold ETFs and other commodity ETFs are treated as non-equity
funds. Groww+3HDFC Fund+3ClearTax+3
 If you hold less than 12 months, gains are taxed as per your income tax slab
(short-term capital gains). WealthDesk+3Groww+3ClearTax+3
 If held more than 12 months, long-term capital gains are taxed at 20% with
indexation benefits. WealthDesk+3Groww+3ClearTax+3
 Note: Some sources mention older rules of 36 months for non-equity funds, so
always cross-check with latest tax provisions. HDFC Fund
From a regulatory standpoint, SEBI oversees commodity derivatives and ETF rules. Also,
transparency and audit requirements apply to commodity ETFs to ensure investor
protection.
Comparing with Other Investment Options
ETF vs Stocks
While both trade on exchanges, ETFs offer a basket exposure and diversification, while
stocks represent individual companies. ETFs generally have lower volatility compared to
single stocks but also less upside if one stock outperforms massively.

5. Multibagger Penny Stocks for 2025
Many investors chase high-growth penny stocks (or multibagger penny stocks for 2025),
hoping for 10× returns. However, those carry much higher risk. By contrast, commodity
ETFs offer more stable exposure to commodities, making them suitable as a balancing
instrument in a broader portfolio.
Buy and Sell Unlisted Shares / Unlisted Shares Broker
If you’re involved in alternative investments like buying and selling unlisted shares, or using
an unlisted shares broker, you already know the risks of illiquidity and valuation
uncertainty. Commodity ETFs, in contrast, are listed and highly liquid, giving you a clearer,
more transparent investment route.
Real-World Example & Case Study
Let me share a real investor case:
Case Study – Ms. Shweta’s Gold ETF Strategy
In 2022, Shweta allocated 7% of her portfolio to a gold ETF to hedge inflation. Over the next
three years, gold price rose ~35%. She exited a portion in 2025 to lock in gains. Because
her ETF was physically backed and audited, she had confidence in its authenticity.
Meanwhile, she held on to equities, and her overall portfolio volatility reduced.
Her takeaways:
 Don’t time the market — use periodic contributions
 Don’t overallocate to commodities; treat it as a strategic hedge
 Monitor tax and exit timing to maximize post-tax gains
This example illustrates how commodity ETFs can complement a diversified portfolio.
Best Practices & Allocation Tips
 Limit commodity ETF exposure to 5–10% of your total portfolio. Mr. Forex Says+1
 Use Systematic Investment (small periodic investments) instead of lump sums to
reduce entry timing risk. Mr. Forex Says
 Rebalance periodically — if commodity exposure shoots too high, reduce to
maintain your intended allocation.
 Stay informed about global commodity trends (supply, demand, geopolitics).
 Always check ETF expense ratio, liquidity, and tracking error before selecting.
Summary & Call to Action

6. In summary, a Commodity ETF India offers a modern, regulated, and convenient way to
invest in commodities like gold and silver without physical hassles. They trade like stocks,
offer diversification, and help hedge inflation — all while maintaining transparency and
liquidity. However, you must pay attention to costs, tracking errors, and tax rules before
investing.
If you’re interested in integrating commodity ETFs into your portfolio or want help
comparing them with equity or unlisted investments, Bharat Unlisted can guide you.
Take the next step: Open a demat account, research leading gold/silver ETFs, and consider
a small pilot investment to gain comfort with the process.
Read More: https://bharatunlisted.wordpress.com/2025/10/15/commodity-etf-india/