SEBI plans to allow mutual funds in commodity derivatives

Intended at increasing the institutional participation in the commodity segment

photo: Reuters

As part of its attempts to increase the institutional participation in the commodity segment, the Securities and Exchange Board of India (SEBI) plans to allow mutual funds and portfolio managers to invest in commodity derivatives segment. This closely follows the recent regulatory decision of allowing a category of Alternate Investment Funds (AIFs) to invest in commodity derivatives.

In a discussion paper released on Thursday, SEBI has put forth proposals to create a regulatory framework to allow MFs and portfolio managers to participate in the commodity segment, which came under the capital market’s purview in September 2015.

For MFs, the regulator is evaluating whether fund houses can be allowed to invest in commodity derivatives through existing schemes with certain investment restrictions or safeguards or there is a need for a complete separate set of schemes.

The separate schemes could be commodity arbitrage funds, exchange-traded funds or open-ended schemes based on commodity derivatives.

In terms of existing schemes, the regulator has sought public views on whether fund houses can be allowed to invest a certain part of the scheme’s assets under management (AUM) in commodity derivatives though it should never be allowed to be 100% of the AUM and further the exposure towards one commodity should be capped at 10%.

For portfolio managers, SEBI has sought public view on issues like the extent of leveraging, mechanisms to safeguard client interests, pooling of client money and disclosure requirements.

New asset class to investors

The regulator is of the view that commodity derivatives will provide a new asset class to the investors who may benefit with better portfolio diversification. Adding commodities in the portfolio would typically increase some risk, but the overall risk adjusted return of the portfolio may improve, stated the discussion paper.

The regulator has fixed December 31 as the deadline for public to submit comments and suggestions on the various proposals put forth in the discussion paper.