MFs seek to set up commodity focussed funds

Mutual fund houses are planning to float commodity-focused funds which will invest in gold, silver, cotton, oil and oilseeds and grains. The move will need amendment to the Securities and Exchange Board of India's (MF) regulation 43, which governs MF investments.

As per the existing provision of the Securities Contracts (Regulation) Act, 1956 (SCRA), commodities and their derivatives do not fall under the definition of 'securities'.

Thus, Sebi is not empowered to regulate these markets. Mutual funds are, therefore, prohibited from investing in commodities, including bullion and their derivatives.

The commodity exchanges of the country and the Association of Mutual Funds (AMFI) are planning to jointly move the Reserve Bank of India (RBI) and Sebi to permit mutual funds to invest in commodities.

Given the poor track record of plantation companies, mutual funds are trying their best to avoid the collective investment scheme (CIS) route to float the funds. CIS offers the simplest way to enter into the commodity business, since it does not entail any changes in the regulatory framework.

According to a primary concept report circulated to AMFI members, mutual funds can participate in gold business through bank-floated gold-accumulation plans, float special commodity funds or through collective investment schemes.

According to a proposal prepared by the National Commodity and Derivatives Exchange (NCDEX), an amendment to MF regulations will be required before mutual funds can participate through the bank gold accumulation plan.

The definition of securities has to be changed to allow MFs to invest in commodities and their derivatives as well. There will also be need for a clear demarcation of regulatory powers between Sebi and the Forward Markets Commission (FMC).

The RBI, likewise, needs to permit banks to launch gold (and silver) accumulation plans which enable individual investors to seek commodity linked returns on these instruments.

The other suggested route is for FMC, the commodities market regulator, to develop its own regulations for commodity funds on the lines of Sebi MF regulations. These funds will invest only in commodities.

However, the industry believes that this may not be an effective route because such commodity-focused funds cannot enjoy the benefits of portfolio diversification.