Sebi’s Gold ETF Rule Change: How New Asset Allocation Norms Will Reshape Bullion Investment Strategy in India

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• April 10, 2026
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The Securities and Exchange Board of India has revised asset allocation requirements for gold exchange-traded funds, permitting fund managers greater flexibility in holding physical gold versus gold-related instruments. This regulatory adjustment aims to improve liquidity management and reduce tracking errors that have long plagued Indian gold ETFs compared to their global counterparts.

New Delhi, April 2025 — Sebi’s amended guidelines allow gold ETF schemes to invest between 95-100% of assets in physical gold and gold receipts, a shift from the previous mandate requiring near-complete allocation to physical bullion. The change addresses a structural inefficiency that fund managers have flagged since India’s gold ETF market crossed ₹35,000 crore in assets under management in 2024.

What Is Driving This Regulatory Shift?

Indian gold ETFs have historically suffered from tracking errors averaging 0.5-1.5% annually, significantly higher than the 0.1-0.3% range typical of mature markets like the United States. Sebi’s intervention responds to sustained industry feedback that rigid physical gold requirements created operational bottlenecks during high-volatility periods. The regulator’s move follows a broader pattern of ETF market liberalisation that began with the 2023 passive fund expense ratio rationalisation. Fund houses can now maintain modest cash buffers without breaching compliance thresholds during redemption surges.

What Does This Mean for Retail Investors?

Retail investors holding gold ETFs should expect marginally improved returns over medium-term horizons as tracking errors compress. The operational flexibility will prove most valuable during periods of sharp gold price movements when funds previously struggled to match benchmark performance. Investors comparing gold ETFs with sovereign gold bonds must now factor in this enhanced efficiency alongside the SGBs’ 2.5% annual interest advantage. New investors entering the gold ETF space will benefit from tighter bid-ask spreads as market makers gain confidence in fund liquidity management.

How Does India’s Framework Compare Globally?

The amended Indian framework now aligns more closely with UCITS-compliant gold ETFs in Europe, which permit up to 10% allocation in cash equivalents for liquidity management. American gold ETFs under SEC oversight operate with similar flexibility, contributing to their superior tracking performance. India’s previous rigid structure was a legacy of early-stage market development priorities that emphasised investor protection over operational efficiency. The convergence with global standards positions Indian gold ETFs more competitively as foreign portfolio investors increasingly examine emerging market commodity products.

• Indian gold ETF AUM reached ₹38,400 crore by March 2025, representing 4.2% of total ETF assets
• Average tracking error for Indian gold ETFs stood at 0.87% in FY24 versus 0.15% for SPDR Gold Shares in the US
• Sebi’s new framework permits 95-100% physical gold allocation, freeing up to 5% for liquidity management
• Gold ETF folios in India crossed 58 lakh in early 2025, a 340% increase from pre-pandemic levels
• The regulatory change takes effect from the next financial year beginning April 2025

What Should Investors Watch?

Investors must monitor whether fund houses pass efficiency gains through to unitholders via reduced expense ratios or retain them as margin improvement. The competitive dynamics among the twelve gold ETF providers will determine how quickly tracking error improvements materialise across the industry. Sebi’s accompanying disclosure requirements mandate that funds report their actual physical gold holding percentages monthly, enabling investors to compare liquidity management practices across schemes.

Analyst’s View

Sebi’s measured liberalisation represents sound regulatory evolution rather than dramatic reform, addressing a technical friction without compromising the fundamental gold-backing that underpins investor confidence. The change arrives at an opportune moment as gold prices test historic highs and retail participation in commodity ETFs accelerates. Market participants should watch for second-order effects: whether this precedent extends to silver ETFs and whether improved ETF efficiency erodes sovereign gold bond demand when the next SGB tranche opens. The true test will come during the next sharp correction in gold prices, when the new liquidity provisions face operational stress for the first time.