As RBI norms weigh, fund houses may pare gold fund investments

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Sep 3 2013, 13:50pm hrs
Mutual funds find themselves in a bind over accepting fresh investment in gold funds and gold exchange-traded funds (ETFs) as the RBIs new guidelines aimed at restricting gold imports have made it difficult for fund houses to source physical gold. Funds are required to hold physical gold equivalent to the value of units sold to investors.

Sources said fund houses are mulling over doing away with fresh cash investments in their gold funds and gold ETFs. However, any measures to this effect are likely to be temporary, they said.

Axis MF is one fund house which his likely to stop fresh investment in its gold funds soon. It has become difficult to source physical gold and, to that extent any fresh inflow into gold schemes would remain undeployed in line with scheme objectives, said R Sivakumar, head, fixed income, Axis Mutual Fund.

As yet, we havent stopped fresh investments. However, we are keeping a close watch on the situation, said Deepak Chatterjee, CEO, SBI MF. Chatterjee added that at present the inflows into the fund houses gold funds and outflows from its gold ETFs cancelled each other out, which is why there was no need to source additional gold.

However, he said a bulk investment could throw things out of gear. What if we get a bulk investment tomorrow and are not able to source the same quantity of physical gold or if the sourcing gets delayed by a day or two This could lead to a price mismatch, which could impact investors adversely, said Chatterjee. Notably, Reliance Mutual Fund had suspended new subscriptions in Reliance Gold Savings Fund way back in June, purportedly to support the government in its drive to discourage import and investments in gold.

Investors invest in gold funds through cash subscriptions. These funds, in turn, invest in Gold ETFs. Direct investors in gold ETFs, on the other hand, typically buy or sell units from the exchange or from authorised participants, also known as market makers.

Investors prefer to invest in gold funds by paying cash as it is a more convenient route than investing through gold ETFs. It is the gold fund segment that will get impacted the most, said Sivakumar.

According to RBIs new guidelines released on July 22, banks have to ensure that 20% of gold imports are made available for exports. Also, banks need to ensure that any gold for domestic use is disbursed only to entities engaged in the jewellery business or bullion dealers supplying gold to jewellers. As a result, banks have decided to stop gold sale to MFs until the RBI lends more clarity on the matter, confirmed Sivakumar of Axis MF.

Mutual funds prefer buying the yellow metal from banks because of the convenience, quality and cost advantage they offer. Although MFs can buy gold from non-bank entities as well, these entities are not equipped to handle the kind of volumes required by fund houses on a daily basis, said market watchers.

As of June 30 this year, there were about 10 gold funds in the market with an AUM totalling R2,142 crore. Gold ETF assets from 12 schemes amounted to R9,211 crore. Between April and July, gold ETFs have seen net outflows of R344 crore.