Mutual funds halt new gold FoF investments, ETF channel kept open

Gold ETFs attracted net inflows of Rs 4,451 crore in September, the highest in six months. The inflow figures include investments routed through gold FoFs, as these funds ultimately invest in gold ETFs.

The restrictions, according to mutual fund (MF) officials, were imposed on the instructions of the Securities and Exchange Board of India (Sebi). Investments in gold ETFs can contribute to demand for physical gold, as these funds are required to hold gold corresponding to their assets under management. This demand can, in turn, add to India’s gold import bill.

According to DP Singh, former joint chief executive of SBI Funds Management, the curbs may temporarily affect AMCs but are justified from the perspective of the larger national interest. “The money earmarked for investment will find its way into other asset classes. The impact on AMCs’ business, if any, will be negligible,” he said.

The recurrent closures, experts said, is also detrimental for FoFs as a product.

“An FoF that has to suspend fresh investments for reasons ranging from broader concerns such as high import bills to premiums in the underlying ETFs has a structural problem, not a temporary one. Each such closure risks eroding investor confidence and pushing investors away from the category,” said Dhirendra Kumar, Founder and Chief Executive, Value Research.

Late on Thursday, fund houses issued notices stating that lumpsum investments, along with new systematic transactions like SIPs would be discontinued from Friday. Existing SIP, STP and switch transactions will continue. 

Gold ETFs, however, remain open for investments.

In June, fund houses had imposed similar restrictions on FoFs and new unit creation in ETFs, citing prevailing economic and market conditions. The curbs came amid sharp rupee depreciation and calls from the Prime Minister to reduce gold investments. Most fund houses lifted the restrictions in the following months.