Ahead of festival season, mutual funds halt fresh investments into gold FoF

Ahead of the festive season, several prominent mutual fund houses have halted fresh investments in gold exchange-traded funds (ETFs), citing concerns over the widening trade deficit and a volatile rupee. Nearly 17 fund houses have ceased accepting new money into gold Fund of Funds (FoF), which invest in mutual fund schemes. Established players such as HDFC, ICICI Prudential, Kotak, DSP, and Tata have stopped both lump-sum investments and new Systematic Investment Plans (SIPs), STP, and switch-in registrations starting October 16.

However, existing SIPs remain active. Inflows into gold ETFs surged by 49% in the September quarter, reaching ₹8,606 crore, compared to ₹5,759 crore in the June quarter. Gold ETF assets increased by 9% to ₹1.86 lakh crore, up from ₹1.70 lakh crore in the previous quarter. Prithviraj Kothari, President of the India Bullion and Jewellers Association and Managing Director at RiddiSiddhi Bullions, noted that gold imports are a significant component of India's trade deficit, with the rupee weakening to around 96.7 against the dollar on October 9.

Regulators are considering slowing dollar outflows due to the gold's near $4,185 per ounce price and the festive demand. Many major fund houses have launched FoF schemes, with 50% invested in gold ETFs and the rest in silver ETFs. Akshat Garg, Head of Research & Product at Choice Wealth, emphasized that each silver ETF unit should be backed by physical silver in a vault, as domestic silver scarcity can cause the ETF's market price to soar, leading to a premium over its indicative NAV.

By suspending fresh inflows, fund houses aim to prevent new investments from entering at an inflated price, thus acting in the best interest of investors, not due to liquidity constraints.