SEBI has halted new inflows into gold fund-of-funds (FoFs) starting October 16 to help manage gold demand and support the rupee. While FoFs are restricted, gold exchange-traded funds (ETFs) remain fully operational, allowing investors to continue trading through stock exchanges. This move comes as gold imports have declined by 27.32% during the April-September period.
The Securities and Exchange Board of India (SEBI) has directed mutual fund houses to stop accepting new investments into gold fund-of-funds starting October 16. This measure aims to cool down gold demand, which regulators believe is necessary to reduce pressure on the Indian rupee. The restriction covers lump-sum contributions as well as systematic investment plans (SIPs) and systematic transfer plans (STPs) directed toward these feeder funds.
Gold fund-of-funds are popular among retail investors because they allow exposure to gold without needing a demat account or a stock market trading account. These funds work by investing in underlying gold exchange-traded funds (ETFs). However, SEBI’s latest order does not include gold ETFs, which continue to trade freely on stock exchanges. Because investors can still purchase gold ETFs through their brokers, the actual impact on gold investment volumes remains to be seen.
Data shows that gold fund-of-funds account for approximately 34% of the total gold assets managed by the mutual fund industry, while the remaining 66% sits in the ETF space. Because ETFs involve complex trading structures, regulators have not restricted them, as halting their operations would prevent existing investors from liquidating their holdings and create significant price volatility. Fund officials have noted that delisting ETFs would make it impossible for investors to exit their positions, making it an impractical tool for controlling demand.
The timing of this directive has prompted questions from market observers, particularly given that official import figures for the first half of the financial year show a 27.32% decline. Gold imports for the April-September period stood at $19.27 billion. Since physical demand for jewellery, coins, and bars remains the primary driver of total gold consumption in India, financial product restrictions may only have a marginal effect on the nation’s current account deficit.
Investors who were previously using fund-of-funds for their gold exposure will now need to evaluate their options. Those wanting to continue investing in gold-linked financial assets may need to open a demat account to access gold ETFs if they do not already have one. The main monitorable for the market will be whether investors shift their capital to ETFs or if they decide to pause their gold investments. The effectiveness of this move in stabilizing the rupee and reducing import pressure will depend on whether this measure limits total demand or simply diverts it to other channels.