Mumbai, Oct. 17 -- 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 MFs 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 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 curbs may achieve little if investors go for direct gold ETF buys. "The intention is to curb fresh investment in gold," said Kartik Sankaran, founder of Fiscal Fitness, a mutual fund distributor. "However, halting gold FoF inflows while allowing creation of new ETF units could defeat the 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 raise demand for US dollars, putting pressure on the rupee. They also widen the trade gap and, in turn, the current account deficit, 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 and 11 March. Prices have since cooled and are now down 8%. An email to Sebi seeking comment went unanswered. Gold ETFs account for about 66% of the industry's gold assets, while 34% sits in 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. Anil 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. This would also prevent investors from selling units on the exchange, he said. If fresh investments are to be curbed without hurting investors' ability to exit, then gold FoFs is the only way AMCs can stop new flows, Ghelani said. An AMC official said fund houses could also restrict fresh investments in gold ETFs by halting issuance of new units. However, this could cause the ETFs to trade at a premium to their net asset value if supply of units is short of demand. The rationale for Sebi's move remains unclear, particularly as India's gold imports fell in the September quarter, an industry official said. Gold imports fell 27.3% to $19.27 billion during April-September, from $26.51 billion a year ago. In September, imports were at $1.80 billion versus $9.61 billion a year ago. Gold-related MF investments make for only a small part of India's overall gold demand, 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 MFs only slows down one financial stream. It doesn't control physical retail jewellery buys, direct bar-and-coin buying, or existing systematic investment plans (SIPs), which still account for bulk of India's massive annual gold consumption," Ramaswamy said. Gold ETFs attracted Rs.45,951 crore in net inflows in the year to September, as per the Association of Mutual Funds in India. January saw for the largest share, at Rs.24,039 crore. In June, large fund houses had also restricted high-value investments in gold ETFs and FoFs, primarily limiting investments of Rs.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....