A Gold ETF has its prospectus vetted by SEBI and collects funds from investors. These Gold ETF's collect money from the investors and buy assets such as Gold, Debt or may retain a Cash component. They are in dematerialized form and one is issued units. A mutual fund house purchases gold from a bank. An investor may purchase units say 1 gram, 10 grams or in kilograms. You need to have a demat account. Your purchased units are stored in dematerialized form or in your demat account. These are traded, mainly bought and sold on a stock exchange such as the NSE. Here units can be easily converted into cash. These funds usually track the price of physical gold in the international market such as London Bullion Market .

The custodians are responsible for purchasing and guaranteeing the purity of the gold. These also are responsible for the custody of the gold. This gold is 99.5% pure and is generally called 24 karat gold. This gold is fully insured and is not used for lending. The Gold ETF's are treated as gold for tax purposes. The Gold ETF needs to be held for at least 3 years to avail tax benefits under exemption from long term capital gains tax under section 54 F or Section 54 EC of the Income Tax act 1956.One will have to pay wealth tax on the market value of Gold ETF lying in your account as on March 31st of that year. The tax payable is 1% of the market value of these assets exceeding 30 Lakhs.