Will the restrictions curb gold investment flows and help address the underlying concerns?

The impact could be limited as investors can shift to gold ETFs, which remain open for investments. Industry officials estimate that FoFs account for roughly a quarter to a third of flows into gold ETF inflows, although the share varies across fund houses. However, there could be a slowdown in inflows in the near term as FoFs are a preferred channel for retail investors, particularly those investing through distributors. Unlike ETFs, FoFs do not require a demat account. The restrictions could therefore disrupt the preferred investment route for some investors, even if others eventually move to ETFs.

Why the restrictions do not apply on gold ETFs?

Gold ETFs remain open even as several fund houses have stopped fresh subscriptions to FoFs. Industry officials believe restricting ETFs would be a more consequential step and could send a stronger signal to the market. ETFs hold a relatively small quantity of gold compared with India’s annual consumption, with holdings accumulated over nearly two decades. A blanket restriction on ETFs would therefore represent a more significant intervention.

How will the restrictions affect investors?

Investors with existing SIPs, STPs and switch arrangements can continue with their scheduled transactions. However, those looking to start new SIPs or make fresh lump-sum investments will not be able to do so in the affected FoFs. Investors seeking fresh exposure to gold ETFs will have to take the demat route, as ETFs remain open for investments. This could inconvenience retail investors who prefer FoFs because they do not require a demat account.