Last Updated : Mar 04, 2019 05:57 PM IST | Source:

MFs could use commodity derivatives as hedging tool

This move will prompt fund managers to float independent commodity funds or commodity dedicated funds and hybrid schemes

Himadri Buch @himadribuch

Mutual fund houses in India were so far not permitted to invest in commodities other than gold. At most, a few fund houses had thematic funds investing in the equity of companies engaged in the commodities business.

But that is set to change with the Securities and Exchange Board of India circular on March 1, 2019, permitting MFs to invest in commodity derivatives, with an aim to deepen the nascent commodity market.

Industry executives say mutual funds could either launch dedicated commodity funds or use it for hedging purpose. There is also a possibility of fund houses launching hybrid products of equity and commodities.

Commodity exposure

Since SEBI started regulating commodity markets after the Forward Markets Commission (FMC) got merged into it in September 2015, the capital market watchdog had been working toward developing the commodities market by bringing in more products and participants like FPIs, insurance and mutual funds.

SEBI was concerned about low participation of producers and hedgers in the commodity market.

Since 2017, SEBI planned to change commodity market rules to introduce transparency, reduce risks and include new participants such as banks, mutual funds, foreign portfolio investors (FPIs) and alternative investment funds, in an effort to improve liquidity.

This move will give retail investors indirect exposure to the commodities market for the first time.

Commodity funds will be able to invest in a broader spectrum of commodity derivatives agricultural, metal and mining commodities such as food crops, spices, fibres, copper, aluminium, oil, gold, silver, and platinum.


Mutual fund officials said MFs can hedge with commodities derivatives against wild swings in metals, oil and gas and other commoditised equities.

Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund, said, “Industry has got a new asset class for asset allocation and a hedging tool.”

According to fund managers, this move will prompt fund managers to float independent commodity funds or commodity dedicated funds and hybrid schemes.

As per asset managers, commodity derivatives can be used as a hedge against equity market oil price shocks. Secondly, in stark currency depreciation causing stress on oil payment deficits, commodity derivatives have an indirect hedge role for portfolios.

Also, in the case of a slowdown in metals or utilities, commodity derivatives can act as a hedge in hybrid portfolios, fund managers said.

However, fund houses said the rules of trading will be known after SEBI releases final guidelines to invest in commodity derivatives.


Concurring Patel’s view, another fund manager from a bank-sponsored fund house said commodity derivatives can be part of hybrid schemes that give diversification flavour across equities commodities and debt.

Hybrid funds with equity debt and gold already exist in the MF space.

The industry is now waiting for SEBI regulation to understand the extent to which commodity derivatives could be used for hedging purpose.
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First Published on Mar 4, 2019 05:57 pm
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