Regulatory Changes Restrict Gold Fund-of-Funds, Pushing Investors Toward ETFs

Recent regulatory adjustments have introduced new complexities for investors looking to hold gold through mutual funds in India. Historically, investors without demat accounts utilized gold fund-of-funds (FoF), which directed capital into gold exchange-traded funds (ETFs), as a straightforward way to maintain a portfolio hedge.

However, mutual fund houses issuing gold FoF products recently notified investors that further investments into these funds have been stopped. Effective October 16, 2026, all new lumpsum investments, switch-ins, and new registrations for systematic investment plans (SIPs) or systematic transfers into these funds are blocked. Existing SIPs registered prior to October 16 are permitted to continue, while gold ETFs remain free of such restrictions.

The suspension of these funds creates immediate challenges for investors lacking a demat account, effectively removing their ability to purchase gold in paperless form. Furthermore, existing investors running SIPs or systematic transfer plans cannot increase their allocation amounts through these channels.

For investors navigating these changes, opening a demat account to purchase gold ETFs directly from stock exchanges is the primary alternative. While physical gold purchased from jewellers often involves quality concerns, mark-ups, and resale penalties, regulated ETFs are backed by standard gold of 99.5 percent purity stored in designated vaults and verified by independent auditors.

Despite these advantages, transitioning directly to exchange-traded funds requires careful navigation. Unlike mutual funds, the SIP route is unavailable when purchasing ETF units directly on exchanges, requiring investors to manually track prices and execute lumpsum investments during market dips.

Additionally, ETF units trade at market prices that can diverge significantly from the underlying net asset value (NAV). During high-demand periods, prices can trade at premiums of 7 to 8 percent, directly impacting returns. Investors are advised to check the indicative NAV (iNAV) published by fund houses to verify the true value before placing a trade.

Screening for ETFs also requires attention to structural differences rather than nominal unit prices. Lower nominal prices do not automatically indicate a cheaper option, as different funds represent varying amounts of underlying gold per unit, ranging from 0.01 gram to smaller fractions such as 0.001587 gram, and older funds reflect the cumulative impact of annual management fees.

Liquidity is another critical factor. While certain gold ETFs record substantial daily transaction volumes running into crores, others record very low trading activity. Investors must verify consistent trading volumes over extended periods rather than relying on single-day metrics.

Looking ahead, the long-term utility of gold ETFs may face further evolution. Regulatory provisions have been introduced allowing gold ETFs to back portions of their NAV with gold derivatives, deposit receipts, or government-backed receipts, and regulatory bodies have proposed potential shifts toward electronic gold receipts instead of physical holding. While current ETFs remain overwhelmingly backed by physical gold, any future transition to paper-backed assets could require investors to re-evaluate gold ETFs as a portfolio hedge.

"The recent restrictions on gold fund-of-funds highlight the evolving regulatory landscape for retail investments in India. While gold ETFs remain a strong, regulated alternative to physical gold, investors must adapt to a more hands-on approach. Moving away from automated mutual fund routes means individuals now need to pay closer attention to market pricing, trading liquidity, and indicative NAVs to avoid paying unnecessary premiums that can eat into their returns." — Dr. Shishir Gupta, Founder & CEO, StartupLanes