Capital markets regulator Sebi today proposed to allow mutual funds and portfolio managers to invest in commodity derivatives market in its latest attempt to widen investments in this asset class.
Sebi has been taking several steps to deepen the commodity derivatives market with necessary safeguards ever since it came under its regulatory jurisdiction nearly two years ago and it allowed certain alternative investment funds earlier this year to participate in this segment.
The participants of commodities derivatives market, which was regulated by the Forward Markets Commission (FMC) before it was merged with Sebi (Securities and Exchange Board of India), has been requesting for long for various institutional investors to be allowed to invest.
Floating a consultation paper on permitting mutual funds and portfolio managers to participate in commodities derivative market, Sebi today invited comments from all concerned stakeholders in this regard till the month-end.
However, the consultation paper, which also aims to determine an ideal regulatory framework for such investments, was silent on whether these investors would be allowed in agriculture as well as non-agri commodities.
The Indian commodity derivatives market has been running without any institutional participation thereby lacking the desired liquidity and depth, which is one of the key elements for the efficient price discovery and price risk management.
In past, various committees have recommended allowing domestic and foreign institutional investors in commodity derivatives markets in a phased manner to help in improving the price discovery process.
The regulator has already held a series of meetings with various stakeholders to discuss issues relating to allowing MFs and PMs in the commodity derivatives market.
Sebi said commodity derivatives provide a new asset class to the investors, thereby may benefit them with effective portfolio diversification.
"Adding commodities in the portfolio would typically increase some risk, but the overall risk adjusted return of the portfolio may improve," Sebi said, while noting that a substantial number of investors (including retail investors) are not able to directly access the commodity derivatives market due to lack of knowledge and expertise. MFs and PMs can act as conduits to commodities markets for such investors.
Mutual funds are investment vehicles which pool money from investors by issuing units to them and invest the money thus collected in asset classes and securities in accordance with the investment objectives as disclosed in scheme offer documents of various schemes. In India, MF schemes generally invest in equity or debt instruments of companies, government securities and money market instruments.
Portfolio managers provide a customised service of advising or managing the portfolio of securities or funds of their clients.
At present, except gold ETFs there are no other category of mutual fund schemes having exposure to commodities market.
Some of the investment routes proposed by Sebi include ETFs based on certain commodity derivatives or a basket of them; open-ended passive or active schemes based on commodity derivatives that will invest majority of the AUM in exchange traded commodity derivatives; and Commodity Arbitrage Funds that would seek to benefit from the arbitrage opportunity available between cash and derivatives market in commodities.
Sebi has sought to know if MFs can invest part of funds in hybrid or multi-asset schemes in commodity derivatives and whether Gold ETFs can be permitted to invest in exchange- traded commodity derivatives with gold as underlying as part of gold related instruments to a certain extent.
Another proposal is whether MFs, in case of Gold Fund of Fund Schemes, can be permitted to invest certain percentage of the asset under management in commodity derivatives.
Sebi however noted that while investing in commodity derivatives, the cumulative gross exposure through equity, debt and derivative positions should not exceed 100 per cent of the net assets of the scheme.
It has also sought comments on whether any investment restrictions are needed on MF schemes which invest only in commodity futures and whether investment in one underlying commodity can be capped at 10 per cent.
On PMs, Sebi said it has been suggested that leveraging of portfolio may be permitted in respect of investment in derivatives, which is presently not permitted.
Since investing in high value commodity derivative contracts from individual clients' accounts can lead to concentration risk, pooling of investments may be permitted in respect of transactions in exchange traded commodity derivatives, which is presently not permitted, Sebi said.
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