The suspension of fresh investments into gold exchange-traded fund (ETF) fund-of-funds (FoFs) could be followed by restrictions on gold ETFs themselves, according to Mohit Gang, CEO & Co-founder of Moneyfront, who believes regulators are trying to reduce gold-linked inflows and support the rupee.
Gang said the current restrictions apply only to mutual fund (MF) schemes that invest in gold ETFs and not to gold ETFs traded on stock exchanges. However, he expects the regulatory measures to broaden if the objective is to limit fresh demand for gold-linked investments.
“My sense is even the ETF route might not remain open for pretty long,” Gang said. “Very likely, in all likelihood, the ETFs will also be stopped pretty soon.”
Gang said the restrictions come at a time when India is preparing for the festive season, when demand for gold typically rises. He added that policymakers may also be trying to prevent proceeds from maturing Sovereign Gold Bonds (SGBs) from flowing back into gold investment products over the coming months.
Explaining the difference between the two products, Gang said fund-of-funds invest in units of gold ETFs, while the ETFs themselves continue to trade on stock exchanges and can still create fresh units to meet investor demand.
“The stoppage currently only applies to fund-of-funds investing into the ETFs,” he said, adding that fresh ETF unit creation by authorised participants continues for now.
According to Gang, the immediate impact will be felt by retail and high-net-worth investors who invest through systematic investment plans (SIPs) in gold FoFs. He noted that fresh subscriptions, switches, SIPs and systematic transfer plans (STPs) into these schemes have been suspended, while existing SIPs will continue.
He also cautioned that if investors migrate from FoFs to ETFs, demand for exchange-traded products could increase, potentially creating a premium over their underlying net asset value (NAV).
“If unit creation stops, then these will start quoting a lot of premium,” Gang said. He advised investors to compare the ETF’s market price with its NAV before investing.
Gang believes investor demand for gold is unlikely to disappear because of regulatory restrictions.
“The more you try to curtail, the more people find routes and avenues for investing into these commodities,” he said, adding that investors could shift from fund-of-funds to ETFs and eventually to physical gold if additional restrictions are imposed.
For the full interview, watch the accompanying video
SEBI’s gold fund curbs may be first step before ETF restrictions, says Moneyfront’s Mohit Gang
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