Commodity markets regulator Forward Markets Commission (FMC) is weighing the possibility of allowing portfolio management services (PMS) in commodities. This will open up a whole new avenue of commodities investment, which is confined to gold and silver. It will allow investors to benefit from the current commodities bull run, as well as lend more depth to the derivatives market and trading system.
Portfolio management is very popular among high net-worth investors in the capital market. There are even funds specifically for real estate and debt. Portfolio advisory services were earlier allowed in commodities, but were banned by FMC in 2007.
“Our draft guidelines for PMS are ready. But, we are awaiting the Forward Contracts (Regulation) Amendment Bill to be passed by Parliament, before allowing PMS in commodities,” said FMC Chairman B C Khatua. The FCRA Bill, which seeks to give the regulator more powers and allow several new instruments and tools to be introduced, is awaiting Parliamentary approval.
Like in equities, broking firms would handle PMS in commodities for individual investors. Mutual funds and banks are also likely to be allowed to offer PMS initially in precious metals, base metals and energy products.
This could later be expanded to include agriculture commodities. Presently, MFs and wealth management firms are big PMS players in debt and capital market instruments.
| NEW AVENUE |
| * PMS is very popular among high net-worth individuals in the capital market |
| * With guidelines ready, FMC is only awaiting Parliament passing legislation |
| * Warehouse receipts against goods lying with them to be tradable on exchanges |
| * Analysts say small investors might not take to PMS in commodities |
“Once the FCRA amendments are through, options and index-based trading could be permitted and after that, various structured products and tools could be introduced and various investment strategies implemented. That will make PMS practical,” said Jayant Manglik, President, Religare Commodities.
Broking firms and fund houses could offer PMS with a mix of physical investments in commodities like gold in demat form and in structured derivative products. Existing wealth managers could invest part of their portfolio in commodities. This is at present confined to gold and silver, and products linked with them. Once options and index futures are allowed, investments could be in these products, rather than buying physical commodities.
A warehouse regulator is also being set up. Receipts issued by warehouse keepers against goods lying with them will become tradable on exchanges and such receipts could also be purchased for investment.
However, Naveen Mathur, associate director (commodities & currencies) at Angel Broking, believes small investors would be wary of PMS in commodities due to the peculiar nature of the commodity market. However, others feel that small investors could be convinced to put their money into pool accounts for investment in various products.
“PMS will be easier in commodities that have global price references. It would be slightly difficult to manage agriculture commodities as local politics and government intervention will create difficulties,” said Mathur.
Without derivatives markets becoming liquid, PMS for agriculture commodities could destabilise small and regional commodities like mentha oil, guar seed, guargum and isabgulseed, as big money chasing smaller commodities is dangerous. FMC, however, is expected to step cautiously in this regard, said a large broking firm head.
