SEBI Restrictions on Gold Fund-of-Funds: Which SIP Investments Are Affected from October 16?

With the festive season approaching, gold investments are once again attracting attention. However, investors looking to increase their exposure to gold through mutual funds need to be aware of new restrictions on Gold Fund-of-Funds (FoFs), which invest in Gold Exchange-Traded Funds (ETFs).

Effective October 16, several mutual fund houses have restricted fresh investments in Gold FoFs. The measures affect new lump-sum investments, new Systematic Investment Plans (SIPs) and increases in existing SIP amounts. However, investors who already have active SIPs in these funds can continue investing as usual.

Importantly, these restrictions apply to Gold FoFs and not directly to Gold ETFs.

What Is a Gold Fund-of-Funds?

A Gold ETF allows investors to gain exposure to gold through units traded on the stock market. These funds are backed by physical gold held in accordance with applicable regulations.

A Gold Fund-of-Funds takes a different approach. Instead of investing directly in Gold ETFs, investors put their money into a mutual fund that invests in units of one or more Gold ETFs.

This arrangement allows investors to access gold-related investments through a mutual fund without having to select and purchase Gold ETFs themselves. The fund house manages the investment portfolio on their behalf.

However, fresh investments in several Gold FoFs have now been restricted under the latest measures.

What Are the New Restrictions on Gold FoFs?

From October 16, the restrictions announced by participating mutual fund houses include the following:

No fresh lump-sum investments: Investors cannot make new one-time investments in the affected Gold FoFs.

No new SIP registrations: Investors cannot start new SIPs in these schemes while the restrictions remain in effect.

No increase in existing SIP amounts: Investors cannot step up or increase their existing SIP contributions.

Existing SIPs can continue: Investors who already have active SIPs can continue their investments without interruption, subject to the applicable scheme terms.

These restrictions do not mean that all gold-related mutual fund investments have been stopped. Gold ETFs are treated separately, and the restrictions described here do not directly apply to them.

Which Mutual Fund Houses Are Affected?

Several major mutual fund houses have announced restrictions on fresh investments in Gold FoFs. These include:

- HDFC Mutual Fund

- ICICI Prudential Mutual Fund

- Tata Mutual Fund

- Kotak Mahindra Mutual Fund

- Axis Mutual Fund

The measures have also been announced by other fund houses, taking the reported total to 17. Investors should check the latest notices issued by their respective fund houses for scheme-specific details.

Why Have Restrictions Been Introduced?

Gold FoFs invest in Gold ETFs, which generally hold physical gold to back their units. When investment inflows rise significantly, the demand for gold-backed assets can also increase.

India imports a substantial portion of the gold it consumes. Higher gold imports can increase demand for foreign currency, put pressure on the rupee and affect the country`s foreign exchange reserves.

The government has previously taken measures to manage gold imports, including changes to customs duties. Concerns about gold demand, import costs and external financial stability form part of the broader economic context surrounding restrictions on gold-related investments.

However, investors should refer to the relevant official SEBI communications and mutual fund notices for the specific regulatory rationale behind the current restrictions.

Will Existing SIP Investors Be Affected?

The impact depends on the type of gold investment an investor holds.

Those with existing SIPs in affected Gold FoFs can continue their regular contributions. However, they cannot register new SIPs or increase their existing contribution amounts while the restrictions apply.

Investors using Gold ETFs directly are not covered by these specific Gold FoF restrictions. Nevertheless, they should check the latest announcements from their fund providers before making new investments.

With gold remaining a popular investment during the festive season, understanding the difference between Gold ETFs and Gold FoFs is important. Investors should review their existing portfolios, check scheme-specific announcements and consider their financial goals before making changes to their investment plans.