Sebi’s gold fund curbs may have limited impact as ETF route remains open

India’s market regulator has directed mutual funds to bar fresh investments in gold mutual fund schemes, a move likely aimed at curbing demand for the precious metal, but it has left gold exchange-traded funds (ETFs) untouched, a gap that experts say could blunt the curbs because investors can still buy gold through the stock market.
The Securities and Exchange Board of India (Sebi) has asked mutual funds to stop accepting fresh lump-sum investments, systematic investment plans (SIPs) and systematic transfer plans (STPs) into gold ETF fund-of-funds (FoFs) from 16 October, two industry officials told Mint.

The curbs currently do not apply to gold ETFs. The move may be aimed at curbing gold imports and easing pressure on the rupee, which has hit a string of record lows this year. But the gold fund restrictions may achieve little if investors simply switch to buying gold ETFs directly.“The intention is to curb fresh investments in gold,” said Kartik Sankaran, founder of Fiscal Fitness, a mutual fund distributor.
“However, halting inflows into gold FoFs while allowing the creation of new ETF units could defeat the entire purpose.”The distinction matters because investors can buy gold ETFs directly on stock exchanges, although they need a demat account to do so.

Gold ETF FoFs, by contrast, invest in gold ETFs and allow investors to gain exposure to the precious metal without opening a demat account. Higher gold imports increase demand for US dollars, putting pressure on the rupee. They also widen the country's trade deficit and, in turn, the current account deficit (CAD), increasing the need for external financing.
If capital inflows are insufficient, the rupee can weaken further. Gold prices moved sharply in the first quarter of the year. MCX spot gold rose 20% between 31 December 2025 and 11 March 2026. Prices have since started cooling down and are now down 8%.

An email sent to Sebi seeking comment remained unanswered. Gold ETFs account for about 66% of the industry’s gold assets, while the remaining 34% sits in the gold funds currently affected by the restrictions, according to Value Research."This would rather result in redirecting volume from one investment source, Gold FoFs to another," said N.
S. Ramaswamy, head of commodity and CRM at Ventura. Why ETFs are tough to curbAnil Ghelani, head of passive investments and products at DSP Mutual Fund, said stopping inflows into gold ETFs would require asset management companies (AMCs) to delist the funds from stock exchanges.

Such a move would also prevent existing investors from selling their units on the exchange, he said. If the idea is to restrict fresh investments without affecting existing investors’ ability to exit, then gold FoFs is the only way AMCs can stop the new flows, Ghelani said.
An AMC official said fund houses could also restrict fresh investments in gold ETFs by stopping the issuance of new units. However, this could cause the ETFs to trade at a premium to their net asset value (NAV) if the supply of units falls short of demand.

The rationale for Sebi's move remains unclear, particularly as India's gold imports declined in the September quarter, one of the industry officials said. Gold imports fell 27.32% to $19.27 billion during April-September, from $26.51 billion a year ago.
In September alone, imports were at $1.80 billion, compared with $9.61 billion a year earlier. Small segmentGold-related mutual fund investments account for only a small part of India's overall gold demand, which is dominated by physical purchases of jewellery, bars and coins, said Ramaswamy.“Additional gold backing for the gold FoF is sourced not necessarily via new bullion imports; it is also managed from existing domestic inventories.

Restricting mutual funds only slows down one financial stream. It does not control physical retail jewellery purchases, direct bar-and-coin buying, or existing systematic investment plans (SIPs), which still account for the bulk of India's massive annual gold consumption,” Ramaswamy said.
Gold ETFs attracted ₹45,951 crore in net inflows in the year to September, according to the Association of Mutual Funds in India (Amfi). January accounted for the largest share, at ₹24,039 crore. In June, large fund houses had also restricted high-value investments in gold ETFs and FoFs, primarily limiting investments of ₹10 lakh or more.

The move followed Prime Minister Narendra Modi's appeal to Indians to buy less gold to help protect the rupee from further depreciation.