Equity mutual funds may soon look a little different. A recent change by the Securities and Exchange Board of India, or SEBI, has given equity schemes more freedom to use part of their portfolio for gold and silver instruments.
The change does not turn an equity fund into a commodity fund. The main purpose of an equity scheme will remain the same: investment in shares and equity-related instruments. However, after a fund meets its required equity allocation, the remaining part of its portfolio can now have exposure to gold and silver, subject to the rules and limits set by SEBI.
This gives fund managers one more choice. Earlier, the residual part of an equity portfolio could mainly stay in equity, money-market instruments and other liquid assets, along with certain other permitted investments. The revised framework also allows gold and silver instruments in this residual portion.
The real impact may not come from an immediate rise in gold or silver holdings. The bigger change is the extra flexibility that fund managers now have.
What Does Residual Allocation Mean?
The term “residual allocation” may sound complicated, but the idea is simple.
An equity scheme has to keep a certain minimum amount in equities. The rest of the money is the residual portion. Under the new framework, a fund can use this part in several permitted assets, including gold and silver.
For example, a Flexi Cap Fund must keep at least 65% of its total assets in equity and equity-related instruments. A Large Cap Fund must keep at least 80% in large-cap equity. Other equity categories also have their own minimum requirements.
This means a fund cannot simply sell a large part of its equity portfolio and move the money into gold. It still has to respect the minimum equity requirement for its category.
That point is important because the change is about flexibility, not a complete change in the character of an equity fund.
Gold Can Add a Different Type of Exposure
Gold behaves differently from shares in many market conditions. It is not linked directly to the earnings of companies. Its price can also react to inflation, interest rates, currency movements, global uncertainty and investor demand.
Because of this, a fund manager may see gold as a useful diversification tool.
Suppose a manager feels that equity valuations are high. The manager may not want to put every available rupee into stocks at that point. Instead of holding all the excess money in cash or short-term instruments, the fund may use part of its permitted residual allocation for gold.
This does not guarantee better returns. It simply gives the manager another way to spread portfolio risk.
Silver Brings a Different Character
Silver is also a precious metal, but its behaviour can differ from gold.
Silver has strong industrial use. Demand from areas such as electronics, solar technology and other industries can affect its price. Because of this, silver can sometimes show greater price movement than gold.
A fund manager who uses both metals can therefore create a combination of two different types of commodity exposure.
Gold may have a stronger defensive role, while silver may offer greater exposure to industrial demand and commodity cycles. Neither role is certain, and both metals can face sharp price moves.
For investors, this means that the words “gold and silver” should not be treated as if they describe one identical asset.
The 35% Ceiling Needs Context
One of the most discussed parts of the new framework is the potential for equity schemes to use up to 35% of assets for gold, silver and certain other permitted residual investments after the core requirements are met.
However, investors should not read this as a statement that equity funds will put 35% of their money into gold and silver.
It is a permitted limit, not a compulsory allocation.
The actual amount will depend on the scheme documents, the fund manager’s strategy and the applicable investment limits.
This difference is very important. A scheme may have the ability to hold gold or silver but may choose to keep most of its residual money in cash, money-market instruments or other permitted assets.
So the headline limit alone cannot tell investors how a fund will actually behave.
Portfolio Construction Could Become More Flexible
The biggest practical change may come during difficult market conditions.
Imagine a fund has a high equity exposure and the manager sees limited opportunities in some parts of the stock market. The manager has several choices.
The fund could continue to hold selected shares. It could use money-market instruments. It could keep more liquid assets. Under the revised rules, it can also consider gold and silver within the permitted residual allocation.
This gives the manager a wider set of tools.
It may also allow some funds to respond more quickly to changes in market conditions without changing their basic category.
However, this flexibility also places greater importance on the fund manager’s decisions. More choices do not automatically mean better results.
Equity Exposure Will Still Matter
Investors should not assume that the new rule will reduce the equity risk of these funds by a large amount.
The minimum equity requirements remain important. A Flexi Cap Fund still needs at least 65% in equity and equity-related instruments. A Large Cap Fund has an 80% minimum for large-cap equity. A Mid Cap Fund and Small Cap Fund each have a 65% minimum in their respective equity segments.
For many other equity categories, the minimum equity requirement is 80%.
Therefore, the new flexibility sits around the core portfolio rather than replacing it.
An equity fund will still carry equity-market risk. Gold or silver exposure may diversify part of the portfolio, but it does not remove the basic risk of investing in an equity scheme.
Fund Comparison May Become More Important
This change could also make fund comparison more interesting.
Two funds in the same category may have similar equity requirements but use their residual allocations in very different ways.
One fund may hold mostly cash and money-market instruments. Another may use gold or silver. A third may use the residual space mainly for other permitted assets.
Over time, these choices could create differences in returns and risk.
This means investors may need to look beyond a fund’s category name. The actual asset allocation can provide a better idea of how the manager handles the part of the portfolio outside the core mandate.
The scheme’s latest portfolio and its stated asset-allocation limits will therefore become more useful for investors.
It Does Not Replace a Separate Gold Investment
The new rule does not mean investors should stop considering a separate gold ETF or another gold investment.
There is an important difference between owning gold directly through a separate product and allowing an equity fund manager to decide whether the fund should hold gold.
With a separate gold investment, the investor controls the allocation.
For example, an investor may decide to keep 10% of a personal portfolio in gold and rebalance it at a chosen time. If gold sits inside an equity fund, the fund manager decides the size and timing of that exposure.
So the two approaches serve different purposes.
More Freedom Also Means More Responsibility
The new rules give fund managers more room to make portfolio decisions. That can be useful, but it also means investors should understand what they are buying.
A fund with permission to invest in gold and silver does not automatically become safer. It can still have substantial equity exposure and can still fall sharply during a stock-market decline.
Gold and silver themselves are not risk-free either. Their prices can rise and fall sharply, sometimes for reasons that have little connection with company earnings.
The quality of the fund’s overall strategy will therefore remain more important than the presence of a particular asset.
What Investors Should Watch Next
The most useful information will come from actual fund portfolios rather than just the new rule.
Investors should watch how much each scheme holds in gold and silver, whether that allocation remains small or becomes a regular part of the portfolio, and how managers use the flexibility during different market conditions.
The difference between the maximum permitted allocation and the actual allocation will be especially important.
SEBI’s new framework keeps the core identity of equity schemes intact while allowing the residual portion to include gold and silver instruments, subject to applicable limits.
The Larger Change for Investors
The new rule is best understood as a change in portfolio flexibility rather than a dramatic change in equity mutual funds.
Equity remains the main asset. Gold and silver simply become additional tools that fund managers can use within the permitted residual portion.
For some managers, these metals may have little effect on the portfolio. Others may use them more actively as a way to diversify risk or respond to market conditions.
The result could be greater differences between funds within the same equity category.
For investors, that makes one thing especially important: do not judge a scheme only by its name or category. Look at what the fund actually owns, how much it can invest in different assets and how the manager uses that freedom.
In the end, the new framework gives fund managers more room to adjust portfolios, but it does not guarantee better returns. The real test will come from how responsibly and effectively that extra flexibility is used.
