Home >Money >Personal Finance >Covid-19 lockdown on storage vaults presents problems for gold ETFs

A surge in inflows coupled with Covid-19 related disruption in gold vaults may force India’s Gold Funds and ETFs to temporarily halt further money from coming in. SBI Mutual Fund has already halted fresh lumpsums from coming into SBI Gold Fund and will also stop ongoing Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) into the scheme from 6 April. The AMC cited a closure in the vaults by its storage provider as the reason for stopping inflows.

“The physical gold is held in vaults through our custodian. Deutsche Bank is the custodian for SBI – ETF Gold and our vaulting agency is Brinks India Private Limited. In the wake of Covid-19, Brinks India Pvt. Ltd. has notified that their vaults at Mumbai, Pune and Nagpur will remain closed till lock down situation persists. Accordingly, due to the above issue, we may not be able to accept any subscriptions (including on-going/ new SIPs, switch -in) till operations resume to normal functioning," said DP Singh, Executive Director and Chief Marketing Officer, SBI Mutual Fund. SBI Gold Fund is a fund-of-funds (FoF) which invests in SBI Gold Exchange Traded Fund.

The latter is required to hold physical gold against the paper units it issues to investors. SBI Gold Fund has a size of 434 crore (as of 29 February) and SBI Gold ETF has a size of 963 crore. Inflows into Gold ETFs across India’s mutual fund industry jumped about 7 fold from 202 crore in Jan 2020 to 1,483 crores in February 2020.

Physical market participants also noted the effect of coronavirus-related restrictions on gold trading. “The delivery of gold is not taking place as of today due to the lockdown as gold doesn’t come under essential items. On spot exchange, trades are happening, deliveries are scheduled for whenever the lockdown is lifted," said Surendra Mehta, National Secretary, India Bullion and Jewellers Association Ltd.. We might face supply issues if lockdown gets extended.

Other Asset Management Companies, including the nation’s largest ETF, Nippon India ETF Gold BeES which has assets under management of 3,105 crore have not yet announced whether it will stop money coming in. “Till today, we are able to buy or sell gold depending upon flows. We have been able to run our operations as usual till today. In case of any unforeseen circumstances where it won't be possible to manage the fund for the benefit of unitholders as per the terms of offer document we will take appropriate action including closure of the fund for subscription," said Nilesh Shah, CEO of Kotak Mutual Fund which also has a gold ETF and a gold FoF.

Investors can also buy gold through Sovereign Gold Bonds issued by the Government of India, which track the price of gold and pay an interest of 2.5% per annum.

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