At least 17 mutual fund houses in India have reportedly restricted fresh investments in specified gold exchange traded fund Fund of Funds (Gold FoFs), with the restrictions taking effect from October 16. The move comes ahead of Dhanteras and Diwali, when demand for gold traditionally increases.
Major fund houses named in media reports include SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mahindra Mutual Fund, Tata Mutual Fund and Nippon India Mutual Fund. The restrictions differ by scheme and investors should check the latest notices issued by their respective fund houses.
What Are the New Restrictions?
Depending on the scheme, the restrictions may cover:
- Fresh lump sum investments.
- Registrations for new systematic investment plans (SIPs).
- Switch-ins from other mutual fund schemes.
- Certain additional investments and systematic transfer plan (STP) registrations.
However, this is not a freeze on existing investments. Existing registered SIPs and eligible systematic transactions may continue under the applicable scheme rules. Redemptions generally remain permitted, subject to individual fund house notices.
Why Have Fund Houses Restricted Fresh Investments?
- The development comes amid concerns about gold related investment inflows, pressure on the Indian rupee and the country’s gold import bill.
- India relies heavily on imported gold. Increased gold imports can add to demand for foreign currency and put pressure on the trade balance.
- Reuters and other media outlets have reported that the restrictions followed discussions involving the Securities and Exchange Board of India (SEBI). However, the publicly available reports do not establish that SEBI issued a formal written order directing all 17 fund houses to stop subscriptions. The precise regulatory rationale should therefore be treated with caution.
Are Gold ETFs Also Restricted?
- No blanket ban on gold ETFs has been announced in the reports reviewed.
- Gold ETFs continue to trade on stock exchanges such as the NSE and BSE. These exchange traded products are different from Gold FoFs, which invest in gold ETF units.
- Investors should also be aware that an ETF’s market price can differ from the value of its underlying assets. Any claim that gold ETFs are trading at a premium should be checked against the data for individual funds.
What About the Rupee and Foreign Exchange Reserves?
- India’s foreign exchange reserves have faced fluctuations amid pressure on the rupee. However, a reported decline in reserves should not automatically be described as money spent by the Reserve Bank of India (RBI) to defend the currency.
- Changes in reserves can reflect currency intervention, valuation movements, changes in foreign assets and other factors. Claims that the RBI spent exactly $51 billion in four weeks require separate verification before publication.
What Should Gold Investors Do?
- Investors planning to put money into an affected Gold FoF should check the latest official notice from their fund house before placing an order.
- Existing investors should not assume that their investments have been frozen. They should verify whether their SIPs, redemptions and other transactions are affected by the specific scheme’s rules.
- Gold FoFs, gold ETFs and physical gold have different costs, trading arrangements and risks. Investors should assess these differences rather than making decisions based solely on temporary subscription restrictions.
Conclusion
- The reported restrictions on fresh investments in specified gold FoFs mark an important development for Indian mutual fund investors ahead of Diwali. However, the measure does not amount to a nationwide ban on gold purchases or a general suspension of gold ETF trading.
- Investors should rely on official fund-house notices for scheme specific information and watch for further clarification from SEBI and the relevant authorities.
