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Last Updated : May 22, 2019 05:35 PM IST | Source: Moneycontrol.com

SEBI allows fund houses to invest in commodity derivatives; will MFs bite the bullet?

As per the guidelines released on May 21, SEBI has permitted mutual funds to participate in all exchange-traded commodities derivatives (ETCDs) except 'sensitive commodities'.

Himadri Buch @himadribuch
Representative Image
Representative Image

Mutual fund houses so far were 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 SEBI issuing final guidelines on May 21, 2019, permitting MFs to invest in exchange-traded commodity derivatives, with an aim to deepen the nascent commodity market.

But while the capital market regulator SEBI is gung-ho about fund houses investing in commodity derivatives, mutual fund managers sounded skeptical.

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"Commodity derivatives is a volatile space on a standalone basis. So depending on the kind of appetite in the market for commodity exposure, mutual funds will decide to launch commodity-dedicated schemes," said Chirag Mehta, Senior Fund Manager, Quantum Mutual Fund who manages gold savings scheme and gold ETF at the fund house.

Concurring with Mehta, another gold fund manager from a private fund house said, commodity derivatives can be part of hybrid schemes that will give diversification flavour across equities commodities and debt.

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

"Physical delivery is not allowed which could be a hindrance for MFs going for commodity funds," said a CEO of a bank-sponsored fund house.

SEBI GUIDELINES

As per the guidelines released on May 21, SEBI has permitted mutual funds to participate in all exchange-traded commodities derivatives (ETCDs) except the 'sensitive commodities'. Essential commodities in the agri segment are regarded as sensitive.

Hybrid funds and gold exchange-traded funds have been permitted to participate in ETCDs.

However, they have been barred from taking physical delivery.

"No mutual fund scheme shall have net short positions in ETCD on any particular good, considering its positions in physical goods as well as ETCDs, at any point of time," the market regulator said in a circular.

Also, before trading in ETCDs, SEBI has directed fund houses to appoint a dedicated fund manager with requisite skills and experience in the commodities market (including commodity derivatives market).

They have also asked MFs to appoint a custodian registered with the board for custody of the underlying goods, arising due to a physical settlement of contracts.

"This is a welcome step for the Indian Commodity Market. SEBI has addressed many concerns that asset managers will have. However, categorising mutual funds as 'Clients' and subjecting them to participation limits are major concerns. If mutual funds are able to find the right fund manager with an investment mindset (not trading/speculative mindset) that would convince investors to participate in this asset class," said Hiren Chandaria, Commodity Expert and Sloan Fellow at London Business School.

SEBI said that prior to participating in ETCDs, the unit-holders of the existing scheme would be given at least 30 days to exercise the option to exit at prevailing net asset value (NAV) without exit load charges. MFs can participate in ETCDs of a good, not exceeding 10 percent of NAV of the scheme.

HEDGING

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

"Investing in exchange commodity derivatives will largely add value from inflation hedging perspective. For instance, if funds can build Commodity products that reflect one's cost of living, it could indeed be a good allocation for any investor," Mehta explained.

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.

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 the 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.



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First Published on May 22, 2019 04:28 pm
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