Gold exchange-traded funds (ETFs) in India are undergoing a significant structural change due to a recent regulatory shift by the Securities and Exchange Board of India (SEBI). This change allows gold ETFs to allocate a portion of their portfolios to gold derivatives, such as futures contracts, rather than being solely backed by physical gold. Traditionally, these funds were required to maintain a high percentage of physical gold to provide investors with confidence that their investments closely mirrored actual gold prices.

With the new regulations, effective from April 22, 2026, fund managers can now blend physical gold with derivatives, offering greater flexibility in managing their portfolios. This shift, however, introduces nuances that investors should understand. For instance, while gold ETFs will still broadly track gold prices, a small portion of the investment may now be in futures contracts, which carry different risks compared to holding physical gold. These risks include counterparty risk and rollover costs, which can affect returns, especially in volatile markets.

Despite these changes, the core structure of gold ETFs remains intact, as they are still required to keep at least 95% of their assets linked to gold. This means that while derivatives may be used in exceptional situations, such as sudden inflows or when physical gold is hard to procure, the majority of investments will still be in physical gold. Investors are advised to stay informed about their ETF's portfolio composition and consider alternatives if they seek absolute physical backing.