Golden freedom: From London to local; bullion ETF prices to be pegged domestically

Blitz Bureau

NEW DELHI: The Securities and Exchange Board of India (Sebi) has revised the valuation framework for physical gold and silver held by mutual fund schemes, mandating the use of exchange-published polled spot prices for determining their value.

The new norms will replace the existing benchmark-linked approach and are aimed at bringing uniformity and ensuring valuations reflect domestic market conditions.

In a circular issued on February 26, the market regulator said: “It has been decided that with effect from April 1, 2026… mutual funds shall value physical gold and silver by using the polled spot prices published by recognised stock exchanges which are used for settlement of physically delivered gold and silver derivatives contracts.”
Sebi added that the spot polling mechanism must comply with the spot polling guidelines specified by the regulator from time to time.

The decision follows discussions in the Mutual Fund Advisory Committee and public consultation with stakeholders.
Explaining the rationale, Sebi said that since stock exchanges are subject to transparency and compliance requirements under the regulatory framework, “using the spot price published by such regulated entities shall lead to valuation reflective of domestic market conditions and also ensure uniformity in the valuation practices.”
Gold and silver ETF prices in India have traditionally been fixed based on London Bullion Market Association (LBMA) prices because London is the global center for physical bullion trading and its daily “fixes” serve as the international benchmark for settling contracts.

Why LBMA
The use of LBMA pricing was standard practice due to several factors.

• Global benchmark: The LBMA AM or morning fix is the most widely recognised reference price for precious metals, used by central banks, refiners, and mining companies worldwide to value inventories.
• High standards: The LBMA maintains strict standards for the refining and storage of “good delivery” bars, ensuring a uniform quality that ETFs use to back their units.
• Price discovery: The LBMA price is determined through an auction-based process that balances global supply and demand, providing a transparent (though sometimes criticised) daily baseline.

While the LBMA provided a global baseline, it often led to discrepancies between ETF net asset values (NAVs) and actual Indian market prices. Under the current system, LBMA prices must be manually adjusted for:

• Currency conversion: Converting USD / GBP prices into Indian rupees or INR.
• Landed costs: Adding customs duty, GST, transportation costs, and insurance.
• Local premiums / discounts: Factoring in notional adjustments based on domestic demand and supply which were not always uniform across different fund houses.

The transition to domestic polled spot prices (such as those from the MCX) aims to improve the investor experience by:

• Reflecting local reality: Valuations will now directly incorporate domestic supply-demand dynamics and taxes without complex back-calculations from London prices.
• Uniformity: Sebi’s mandate ensures all mutual fund houses use the same domestic benchmark, making it easier for investors to compare different ETF schemes.
• Regulatory oversight: Indian stock exchanges operate under strict transparency and compliance requirements, reducing the potential for pricing errors or inconsistencies.

The new benchmarking system is not expected to lower the fundamental value of Indian gold and silver ETFs. Instead, it replaces a complex manual calculation with a direct market price to improve valuation accuracy and transparency.
While the change modifies the daily calculation of NAV, the actual quantity of physical gold or silver held by the schemes remains unchanged.

Market experts note that while gold and silver ETFs track underlying metal prices, differences in valuation practices, tracking efficiency and liquidity can result in small variations in returns across schemes.
ETFs eliminate concerns about purity, charging, and storage, in contrast to purchasing actual gold or silver. With a few clicks, one can invest in them just like one would in a stock. For many first-time investors, that convenience has been a big attraction.

All that metal

In an interview with Upstox, Satish Dondapati, Fund Manager at Kotak Mahindra Mutual Fund, explains the dynamics of gold and silver ETFs and the broader ETF landscape in India.

Q. Why do different silver / gold ETFs give different returns despite tracking the same metal?
Different gold or silver ETFs can generate slightly different returns even though they track the same underlying metal. These differences mainly arise from how premiums and discounts are factored into the daily NAV calculation.
Different AMCs may follow slightly different methods to account for premiums, discounts, and other related adjustments while calculating the daily NAV.

However, to align the NAV with the domestic spot price of gold (such as MCX spot or IBJA prices), spot premiums or discounts are added. These premiums or discounts are what ultimately create differences in NAV returns across gold ETFs.

Q. What factors determine the price of an ETF?
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.

Q. What is tracking error in an ETF?

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.

Q. Why do prices of silver / gold ETFs move more than the price of silver or gold?
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.

Q. How much should a beginner invest in an ETF initially?

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

Typically, 15–20 per cent 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.

Q. How easy is it to sell an ETF to get the money back?

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 asset management company (AMC), typically in large amounts (for example, Rs 25 crore or more).

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

Q. How do I choose the right ETF for me among many options?

To choose the right ETF, one 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 one 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.

Q. What are the risks involved in investing in gold / silver ETFs?
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 per cent of their overall portfolio.

Q. What are the advantages of investing in ETFs for beginners?
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.

Q. How is the value of an ETF calculated?
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.