Gold FoFs Pause New Investments Ahead of Diwali: Tips for Investors

Investment Options in Gold Limited as Fund Houses Halt Fresh Subscriptions Ahead of Diwali

Investors eyeing gold as a festive investment this Diwali may find their options limited as several fund houses pause new subscriptions to gold funds.

Understanding the Restrictions

The restrictions, effective from October 15 and 16, impact fresh lump-sum purchases, switch-ins, and new registrations for systematic investment plans (SIPs) and systematic transfer plans (STPs). However, existing SIPs and STPs will continue as scheduled, and redemptions remain unaffected. Investors are advised to review their specific schemes for detailed restrictions, particularly regarding top-ups and modifications to existing plans.

Despite these limitations, gold ETFs continue to be traded on stock exchanges, allowing investors with demat accounts to still access gold investments through this route.

Reasons Behind the Decision

The decision to halt new subscriptions is primarily attributed to concerns regarding gold imports and the pressure on the Indian rupee. With Brent crude oil prices soaring above $105 per barrel, the rupee has been trading near ₹95 to the dollar, increasing the demand for foreign currency to pay for imports. Notably, gold imports surged by 24% to $71.98 billion in the fiscal year 2025-26, prompting the government to raise the import duty on gold from 6% to 15% earlier this year.

Experts like Amol Joshi, founder of PlanRupee Investment Services, suggest that such regulatory measures are often implemented to align with national priorities, including curbing import costs and stabilizing the rupee. Sunil Subramaniam, founder of Sense and Simplicity, emphasized that while existing ETF units can be traded, fresh inflows that create new ETF units can exacerbate demand for physical gold.

Alternatives for Investors

For those with demat accounts, purchasing gold ETFs directly on exchanges remains an option. However, investors should weigh the costs associated with brokerage fees and demat account charges against the typically lower expense ratios of ETFs compared to FoFs. Rishit Shah, co-founder of Vitta Mitra LLP, cautioned that a shift in demand towards ETFs could lead to price premiums, urging investors to consider the indicative net asset value (iNAV) before making purchases.

Investors might also explore multi-asset funds, which offer diversified exposure to gold and other assets, although these do not provide the same level of dedicated gold investment as ETFs or FoFs.

Performance of Gold Funds

Gold ETFs and FoFs have delivered an average return of 16.87% over the past year, with a remarkable three-year compound annual growth rate (CAGR) of 35.19%. This performance indicates that a ₹1 lakh investment made a year ago would have appreciated to approximately ₹1.17 lakh, while a three-year investment would have grown to around ₹2.47 lakh. However, the performance has been volatile, with returns fluctuating sharply across different periods.

Despite the recent inflows into gold ETFs, which saw net investments of ₹4,451 crore in September, the overall assets under management have declined from ₹1.91 trillion to ₹1.86 trillion, reflecting the impact of falling gold prices.

What Should Investors Do Now?

Investors with existing SIPs in the affected schemes can continue their contributions as planned. Joshi recommends spreading gold purchases through SIPs rather than opting for lump-sum investments. For those considering new investments, assessing gold ETFs while factoring in trading costs and liquidity is crucial. Additionally, evaluating multi-asset funds for their broader investment mix may align better with individual investment goals.

• 17 fund houses have paused fresh subscriptions to gold FoFs ahead of Diwali.
• Existing SIPs and STPs will continue, while fresh lump-sum investments are restricted.
• Gold imports rose significantly, prompting regulatory action to stabilize the rupee.
• Investors can still purchase gold ETFs directly if they have demat accounts.
• Gold funds have shown strong historical performance, but volatility remains a concern.
• Investors are advised to consider SIPs for gold investments to mitigate risks.

Investor Note: Investors should remain cautious and evaluate their options carefully, especially in light of the current restrictions on gold FoFs. Diversifying investments and considering the costs associated with different gold investment vehicles can help in making informed decisions.