Mutual funds halt fresh investments in gold FoFs amid rupee pressure

Mutual funds have stopped accepting fresh investments in their gold fund of funds (FoFs) from Friday. The restrictions, which mutual fund (MF) officials said were imposed on the instructions of the Securities and Exchange Board of India (Sebi), come amid concerns over the current account deficit and continued pressure on the rupee. Gold is among India’s largest import items by value.

Late on Thursday, fund houses issued notices stating that lump-sum investments, along with new systematic investment plan (SIP), systematic transfer plan (STP) and switch registrations, would be discontinued from Friday. Existing SIP, STP and switch transactions will continue. Some fund houses have announced similar restrictions on silver FoF investments.

However, gold exchange-traded funds (ETFs) and silver ETFs remain open for investments. According to industry officials, the restrictions on FoFs are likely to have some impact on overall gold and silver inflows, as FoFs are the preferred investment channel for retail investors, especially those investing through distributors. FoF investments are easier because, unlike ETFs, they do not require demat accounts.

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