Mutual fund houses have curtailed fresh fund flow into gold exchange-traded funds ahead of the festive season on concern over the widening trade deficit and volatile rupee.
Nearly 17 fund houses have stopped fresh investment in gold Fund of Funds (FoF) which in turn invests in MF schemes.
Leading mutual funds including HDFC, ICICI Prudential, Kotak, DSP and Tata have stopped lump-sum investments and new SIP, STP and switch-in registrations from October 16. However, existing SIPs continue.
Gold ETFs
Inflows into gold ETFs have jumped 49 per cent in the September quarter to ₹8,606 crore against ₹5,759 crore logged in the June quarter. The gold ETF assets increased 9 per cent to ₹1.86 lakh crore against ₹1.70 lakh crore in the June quarter.
Prithviraj Kothari, President of the India Bullion and Jewellers Association and Managing Director at RiddiSiddhi Bullions, said gold is one of India’s biggest imports and the rupee touched about 96.7 to the dollar on October 9.
With gold near $4,185 an ounce and the festive season adding to demand, regulators want to slow dollar outflows, he said.
Many large fund houses had launched FoF that invest 50 per cent in gold ETFs and the remaining in silver ETFs.
Akshat Garg, Head of Research & Product, Choice Wealth said every unit of silver ETF should be backed by physical silver in the vault.
When domestic physical silver gets scarce and prices spike, the ETF’s market price rises faster than the underlying metal it represents. This leads to ETFs trading at a premium to their indicative NAV (iNAV), he added.
Silver premium
In early September, he said the silver premium was near 0.5 per cent, but by the second week of October, it had widened to roughly 5–10 per cent at several houses, he said.
If a fund continues to accept lump sum money at an inflated price, new investors would effectively be buying silver at 5–10 per cent above fair value, he added.
By suspending fresh inflows, fund houses will prevent new money from entering at a distorted price. It is a fiduciary decision, not a liquidity scare, said Garg.
Gold saw a similar episode earlier, and fund houses like HDFC, Axis and Tata capped large inflows around June 2026 — but most of those curbs were lifted by August as conditions normalised, he said.
Aarav Bafna, Director, Akoirah by Augmont, said the lasting answer solution to investment in gold and managing imports lies in recycling.
Households hold an estimated 25,000 tonnes, yet recycling supplies only about 16 per cent of the market. Mobilising even 1 per cent of that stock would add roughly 250 tonnes, about a third of a year’s imports, said Bafna.