Should you invest in Gold Silver ETFs?:Sebi allows mutual funds to invest in metal contracts; how this impacts common man

The capital market regulator, Sebi, updated the rules and regulations of Gold and Silver Exchange Traded Funds (ETFs). Mutual fund houses (AMCs) are now allowed to invest up to 50% of NAV of respective gold or silver ETF into Exchange Traded Commodity Derivatives (ETCDs), commonly known as futures. Previously, these funds primarily held physical bars of gold and silver in government assigned secure vaults. Under the new guidelines, while they still track the price of these metals, they have more freedom to use paper gold (derivatives) to manage the fund. The new Sebi rule will reduce the price mismatch problem between gold ETFs and bullions. Many a times, it has been seen that ETF is overvalued as compared to physical gold. But now, the market watchdog’s latest rule would address this problem to a certain extent. This may drive in more investments likely leading to surge in AMC. -Findoc, MD, Hemant Sood According to Sood, invester should not get perturbed by the market watchdog’s decision and keep investing in commodity ETFs. Sebi has taken decision in favour of retail investors. HDFC Gold ETF updates its strategy HDFC Mutual Fund has officially announced changes to its Gold ETF to align with these new rules. Starting 22 April 2026, the HDFC Gold ETF will have the flexibility to invest up to 50% of its assets in gold-related instruments, including: The fund house clarified that its main goal remains investing in physical gold. The move into futures will be used mainly during times when physical gold is hard to buy quickly, probably during circumstances when there would be liquidity crunch. What this means for common man? 1. Better Liquidity and Flexibility By using futures, fund managers can buy or sell large loads of digital tokens of gold instantly on the stock exchange. This is much faster than physically moving gold bars in and out of a vault, making the fund more efficient during busy trading days. 2. Lower tracking error Sometimes the price of an ETF doesn’t perfectly match the actual price of gold because of the time it takes to buy physical metal. Using futures helps the fund manager keep the ETF price more closely aligned with the real-time market price of gold. 3. Risks Investing in futures is different from holding physical metal. Derivatives come with specific risks as well. Because this is a major change, HDFC is giving investors an exit option until April 21, 2026, allowing them to leave the fund without paying any exit fees if they don’t like the new strategy. To practically decode how your ETF is changing, lets try to look at the difference between holding a gold bar and holding a token of gold. Here is a simple breakdown of the two: 1. Physical gold: Physical gold in an ETF means the fund house actually buys gold bars and locks them in a high-security bank vault. How it works: Every gram of gold you own in the ETF represents a piece of a real bar kept in a safe vault of government assigned agency. Pros: It is the safest way to track gold. There is no risk of the investment disappearing because the metal is physically there. Cons: It is expensive to store and insure. Also, if the fund manager needs to sell gold to pay back an investor, they have to physically move or sell those bars, which can take time. 2. Gold futures: A future is a legal contract to buy or sell gold at a specific price on a specific date in the future. It is traded on an exchange (like the MCX in India). How it works: The fund doesn’t buy a gold bar immediately. Instead, it pays a smaller amount of money called margin to buy the contract at a fixed price. Pros: It is very fast. You can buy millions of dollars worth of gold value in seconds with a click of a button. This makes the futures run very smoothly. Cons: These contracts expire every month or two. To keep the investment going, the manager has to sell the old contract and buy a new one which can cost you few fees and slightly lower the fund’s returns.