Mutual funds stop bulk subscriptions to gold ETFs: Check what's changed, and what happens to your existing SIPs

A number of large mutual fund houses issued notices late on Thursday (15 October) halting bulk subscriptions to gold exchange-traded funds (ETFs) ahead of the festive season in India, according to a Reuters report.

The report noted that public notices were issued by MFs, including HDFC MF, Kotak Mahindra MF, and UTI MF, among others, that did not explicitly cite a reason for the suspension.

• According to the notices posted by the fund houses, investors will be able to continue redeeming their existing gold ETFs.
• Further, those with existing systematic investment plans (SIPs) will also be able to continue to be processed at the prevailing net asset value (NAV).

Why did mutual funds halt gold ETF subscriptions?

As per the Reuters report. citing an MF executive in the know, while mutual funds did not officially provide a reason for the move, the decision follows discussions with the Securities and Exchange Board of India (SEBI). It added that two bullion industry officials confirmed a nudge from the capital markets regulator.

Further, it added that the Indian rupee has been under pressure this year due to a surge in global oil prices, which have inflated the country's import bill, and heavy selling by foreign investors in Indian equities. Strong demand for gold has further weighed on the currency, prompting the government to raise import duties on gold and silver earlier this year.

Anticipating festive season demand?

India is the world's largest consumer of silver and second-largest consumer of gold. However, the country relies on imports to meet most of its demand — something that can pressure the trade deficit, it added.

Gold imports fell to $1.8 billion in September, from $2.3 billion in August. However, Indians will celebrate Dussehra in October and Diwali in early November, when buying gold is considered auspicious. The report noted that demand is thus likely to rise. It noted that subscriptions to gold and silver ETFs surged during last year's festive season amid lower stock market returns.

This move may thus be preemptive. “The move is surprising, as gold and silver imports have fallen sharply over the past two months from a year earlier and have not contributed to the trade deficit. It looks more like a precautionary measure to avoid a surge in imports in October,” a dealer at a private bank that supplies bullion to ETFs told the news agency.

(With inputs from Reuters)