SEBI Committee Considers New Category of Commodity Mutual Funds
Mutual fund investment in ETCDs is likely to be less than Rs.10,000 crore to date. Now, a committee constituted by SEBI is considering launching a new category of actively managed funds wherein investment through ETCD in commodities will be undertaken to the extent of 100%.
SEBI had, in 2019 allowed mutual funds to invest in ETCDs, a standardized agreement traded on regulated stock exchanges. The multi-asset scheme was capped at a maximum of 30% of the net asset value in ETCDs; other hybrid schemes, at a maximum of 10%.
Besides the gold and silver ETFs requiring a physical backing of the underlying commodities, mutual funds can also invest in commodities through gold and silver fund-of-funds. The introduction of ETCDs has still not led to total mutual fund investments in this area increasing to any great extent.
Substantial return opportunities are believed to exist in the commodity segment, according to some in the industry. Since commodities have mostly outperformed arbitraged funds for quite a few periods, this happens to become a good opportunity. If SEBI allows it, then commodity schemes may hold net long of up to 10% while gross exposure in a single commodity could go up to 30% where 20% is hedged and 10% is naked positions.
In commodity trading, a “long” position refers to purchasing a futures contract with the expectation that the price will rise.
There are still problems with ETCDs, however. The first is the lack of liquidity for many commodities. Even assuming schemes must have gross exposure of 10%, a minimum of 10 different commodities will be needed-which may be hard to do. This would provide for 30% gross exposure in a single commodity, which is possible and would make the portfolio comprise just four commodities. The relatively liquid commodities available for investment in today’s markets include gold, silver, castor oil, aluminium, copper, and zinc.
This mutual fund industry has also requested a relaxation of the time frame for the disposal of physical commodities like metals, which will not perish or deteriorate in value with time. Normally, traders are holding the physical commodities until the final expiry, which may be as long as 2-3 years. Mutual funds that participate in ETCDs and receive physical delivery of the commodities have to dispose of the same by the next expiry date of the same contract series or within 30 days of holding the goods under the current regulation.
Two of the most common strategies in the two forms of trades that exist in the commodity space are known as calendar spreads and the other is called directional trades. Calendar spreads, a bit like arbitrage, buy a derivative for one month and sell it for a future month. For example, a trader might buy near-month aluminium futures and sell far-month futures for the same metal. On the contrary, it is a one-way trade where “naked” positions are taken, which is more volatile since such bets on future commodity price movements are speculative.
SEBI has not even made any response to the industry’s appeals and deliberation on creating a new category for commodity funds continues.
