Why have fresh investments into gold FoFs been halted, and what should you do?

About 20 mutual fund houses have reportedly halted fresh lump-sum investments, new SIPs (systematic investment plans) and top-ups in gold fund of funds (FoFs) following regulatory directives on 15 and 16 October. The step, as explained by experts, is designed to curb domestic gold import demand and relieve pressure on the rupee during the festive season, without disrupting direct ETF (exchange traded fund) investments.

What changes?

The fund houses of State Bank of India, Kotak Mahindra, ICICI Prudential, HDFC, Tata and DSP, along with others, have restricted new incremental flows into gold FoFs, though existing active SIPs will continue.

“Fund houses have taken action only in gold fund of funds, not in gold ETFs,” clarified Anil Ghelani, head of passive investments at DSP Mutual Fund.

He emphasized that this is not a market-driven liquidity issue, unlike what was previously seen in micro-cap or small-cap funds, where massive inflows into relatively less liquid stocks created real risks during redemption in the category, while gold remained fully liquid. Also, the restriction targets only one specific entry route.

“Today, if you want to buy any gold ETF, it is listed and actively traded on the NSE and BSE. You can go there and buy at any point in time,” Ghelani added.

A gold FoF acts as a feeder pipe that invests in underlying gold ETFs. At DSP Mutual Fund, the gold FoF has ₹500 crore-600 crore of assets under management, representing roughly 20% of the ₹3,000 crore gold ETF total size. According to data from DSP MF, the total industry size of gold FoF stood at ₹47,359 crore as of August compared with ₹53,638 crore in March and ₹22,837 crore in September 2025.

Ghelani added that this is a structural posturing and investors need not panic by considering these restrictions as an indication of sudden liquidity pressures or price premiums or similar stress points for gold ETFs.

Why this move?

Navneet Damani, senior group vice president and head of research for commodities and currency at Motilal Oswal Financial Services, pointed out that elevated global crude oil prices have put pressure on the dollar-rupee pair, the fiscal math, and the balance of payments.

“If you can’t control crude oil imports, at least gold and silver imports could be curtailed,” said Damani.

He noted that elevated import duties, which rose from 6% to 15% earlier, have not halted official and grey-market inflows. With the festive and wedding season (Navratri, Dussehra and Diwali) driving demand, restricting FoF inflows serves to limit foreign exchange leakage, aligning with Prime Minister Narendra Modi's appeal to defer discretionary gold purchases.

“The reason behind the FoF stoppages is very simple: the government wants to curb demand because this is the festival and wedding season, to stabilize the Indian rupee,” said Pankaj Mathpal, founder and MD of Optima Money Managers.

What investors should do

Despite the gold FoF restriction, investors do not need to change their financial strategies. Damani highlighted that gold has corrected, building in negatives such as accelerating inflation and higher bond yields, making current levels reasonable for gradual accumulation.

However, experts warned against buying out of fear of missing out.

“Investment decisions should depend on requirements. It should not be FOMO because the government is stopping fresh investments into FoFs,” Mathpal advised.

If your portfolio already holds sufficient gold, do not force additional purchases, he said, adding that those needing investment exposure can open a demat account to purchase gold ETFs directly on the exchanges or buy sovereign gold bonds (SGBs) in the secondary market.

That said, investors should note that secondary-market SGB purchases no longer qualify for tax-free maturity gains, bringing in a 12.5% long-term capital gains tax, similar to that for gold ETFs.

“For consumption needs like weddings, physical gold coins, bars, or jewellery remain fully accessible,” he said.

Ultimately, investors can view this restriction as a regulatory adjustment and continue with their planned and goal-aligned allocation toward gold in their portfolio without overallocating to gold due to FOMO.