How SEBI's new mutual fund rule affects investors
What's the story
The Securities and Exchange Board of India (SEBI) has introduced a new rule allowing equity mutual funds to invest up to 35% of their assets in gold and silver. The move is part of a larger effort to make mutual fund schemes more flexible and diversified. Under the revised norms, actively managed equity funds can now invest their residual portion in gold/silver instruments after meeting core allocation requirements. So, how does it affect investors? Let's find out.
Market response
Fund managers get more leeway
The new rule has been welcomed by market experts, who believe it gives fund managers more flexibility to manage portfolios during volatile market phases. Shivam Pathak, CFP and Asset Elixir's founder, said the move gives fund managers more leeway. He added that a higher allocation to precious metals can help lower downside risk during equity market stress but may moderate returns when equity markets are strongly bullish.
Strategic advantage
Diversification and risk management
Chirag Muni, Executive Director at Anand Rathi Wealth Limited, echoed Pathak's views on the strategic advantage of SEBI's decision. He said it gives fund managers more flexibility to diversify portfolios and use precious metals as a portfolio stabilizer during uncertain market phases. The new rule also provides an option for fund managers to invest idle cash in gold/silver instead of staying entirely in cash.
Investment strategy
An additional asset class for diversification
Traditionally, equity mutual funds invested in stocks and parked the remaining portion of the portfolio in cash, debt instruments, or other permitted assets. With the new rule, fund managers can now use a part of that allocation to invest in gold/silver through ETFs or related funds. This gives equity mutual funds an additional asset class for risk management and diversification.
Market resilience
Safe-haven assets
Precious metals such as gold are seen as safe-haven assets and tend to perform better during market stress, inflation, or currency weakness. Silver also benefits from the industrial demand in sectors like electronics and solar energy. Chirag clarified that the change isn't meant to turn equity funds into hybrid funds but allowing exposure to gold, silver can improve diversification because these metals often move differently from equities, acting as a hedge.
Investor impact
What does this mean for investors?
The new rule could lead to higher overall exposure to the precious metals for investors already investing in gold separately via options like gold ETFs, sovereign gold bonds, or physical gold. Pathak advised investors to review their overall asset allocation, and consider this exposure while allocating to gold/silver ETFs. He also warned that excessive commodity exposure might dilute the pure equity nature of these schemes, prompting fund managers to use this flexibility selectively rather than permanently.