Whalesbook
Why Indians Favor Physical Gold Over ETFs
In the first quarter of 2026, Indian consumers purchased 62 tonnes of physical gold bars and coins. This figure significantly outpaced the 20 tonnes acquired through Gold Exchange Traded Funds (ETFs). This strong demand for tangible assets reflects deep-rooted cultural traditions and a perceived sense of security that continues to draw people towards physical gold, even as more transparent and cost-effective investment options like ETFs are available. While bars and coins offer psychological comfort and act as a hedge against inflation, their investment value is often reduced by substantial associated costs.
The High Price of Tangible Gold
Buying physical gold comes with several added expenses that impact its overall value. Premiums over the market price can range from 2% to 10%, with coins and smaller bars typically incurring higher charges. For gold coins, additional minting fees can add another 8% to 16%. The mandatory 3% Goods and Services Tax (GST) further increases the purchase price. Beyond the initial acquisition, holders face ongoing costs for secure storage, such as bank lockers, and insurance. Selling physical gold also involves buyback spreads, where buyers offer prices below the prevailing market rate. In contrast, Gold ETFs track domestic gold prices directly with much lower costs. Their main expenses are annual management fees and expense ratios, which typically fall between 0.5% and 1.13% for major funds.
Market Shifts and Cultural Roots
The preference for physical gold is deeply embedded in India's culture, providing psychological comfort, acting as a hedge against inflation, and serving as a method for transferring wealth between generations. This appeal is amplified by gold's strong recent performance, with returns of 59.2% over the past year. The investment landscape is evolving, however. Gold ETFs saw significant inflows in Q1 2026, with 80% concentrated in January, indicating a growing segment of investors prioritizing pure investment efficiency and easy access via regulated instruments. Total assets under management for gold funds surged nearly threefold to ₹1.71 lakh crore by March 2026. Regulatory measures like mandatory BIS hallmarking for gold jewellery aim to boost consumer trust. While the import duty on gold was reduced to 5% in Budget 2026, this change primarily benefits larger import volumes rather than altering the cost-efficiency of physical gold versus ETFs for the average consumer.
Outlook for Gold Investment
While the first quarter of 2026 showed a clear preference for physical gold, the trend towards investment-led buying in gold, including ETFs and Sovereign Gold Bonds, is expected to persist. The World Gold Council anticipates that geopolitical risks, elevated inflation, and persistently high gold prices will support investment demand. Although jewelry demand may face pressure due to price sensitivity, overall spending could remain resilient. As Indian investors grow more comfortable with digital financial products, a gradual shift towards more efficient investment avenues is likely. Nevertheless, the deep cultural connection to physical gold ensures it will remain a significant, albeit costlier, part of the Indian investment portfolio for the foreseeable future.