New Delhi, Dec 7 (PTI) Capital markets regulator Sebitoday proposed to allow mutual funds and portfolio managers toinvest in commodity derivatives market in its latest attemptto widen investments in this asset class.
Sebi has been taking several steps to deepen thecommodity derivatives market with necessary safeguards eversince it came under its regulatory jurisdiction nearly twoyears ago and it allowed certain alternative investment fundsearlier this year to participate in this segment.
The participants of commodities derivatives market, whichwas regulated by the Forward Markets Commission (FMC) beforeit was merged with Sebi (Securities and Exchange Board ofIndia), has been requesting for long for various institutionalinvestors to be allowed to invest.
Floating a consultation paper on permitting mutual fundsand portfolio managers to participate in commoditiesderivative market, Sebi today invited comments from allconcerned stakeholders in this regard till the month-end.
However, the consultation paper, which also aims todetermine an ideal regulatory framework for such investments,was silent on whether these investors would be allowed inagriculture as well as non-agri commodities.
The Indian commodity derivatives market has been runningwithout any institutional participation thereby lacking thedesired liquidity and depth, which is one of the key elementsfor the efficient price discovery and price risk management.
In past, various committees have recommended allowingdomestic and foreign institutional investors in commodityderivatives markets in a phased manner to help in improvingthe price discovery process.
The regulator has already held a series of meetings withvarious stakeholders to discuss issues relating to allowingMFs and PMs in the commodity derivatives market.
Sebi said commodity derivatives provide a new asset classto the investors, thereby may benefit them with effectiveportfolio diversification.
"Adding commodities in the portfolio would typicallyincrease some risk, but the overall risk adjusted return ofthe portfolio may improve," Sebi said, while noting that asubstantial number of investors (including retail investors)are not able to directly access the commodity derivativesmarket due to lack of knowledge and expertise. MFs and PMs canact as conduits to commodities markets for such investors.
Mutual funds are investment vehicles which pool moneyfrom investors by issuing units to them and invest the moneythus collected in asset classes and securities in accordancewith the investment objectives as disclosed in scheme offerdocuments of various schemes. In India, MF schemes generallyinvest in equity or debt instruments of companies, governmentsecurities and money market instruments.
Portfolio managers provide a customised service ofadvising or managing the portfolio of securities or funds oftheir clients.
At present, except gold ETFs there are no other categoryof mutual fund schemes having exposure to commodities market.
Some of the investment routes proposed by Sebi includeETFs based on certain commodity derivatives or a basket ofthem; open-ended passive or active schemes based on commodityderivatives that will invest majority of the AUM in exchangetraded commodity derivatives; and Commodity Arbitrage Fundsthat would seek to benefit from the arbitrage opportunityavailable between cash and derivatives market in commodities.
Sebi has sought to know if MFs can invest part of fundsin hybrid or multi-asset schemes in commodity derivatives andwhether Gold ETFs can be permitted to invest in exchange-traded commodity derivatives with gold as underlying as partof gold related instruments to a certain extent.
Another proposal is whether MFs, in case of Gold Fund ofFund Schemes, can be permitted to invest certain percentage ofthe asset under management in commodity derivatives.
Sebi however noted that while investing in commodityderivatives, the cumulative gross exposure through equity,debt and derivative positions should not exceed 100 per centof the net assets of the scheme.
It has also sought comments on whether any investmentrestrictions are needed on MF schemes which invest only incommodity futures and whether investment in one underlyingcommodity can be capped at 10 per cent.
On PMs, Sebi said it has been suggested that leveragingof portfolio may be permitted in respect of investment inderivatives, which is presently not permitted.
Since investing in high value commodity derivativecontracts from individual clients' accounts can lead toconcentration risk, pooling of investments may be permitted inrespect of transactions in exchange traded commodityderivatives, which is presently not permitted, Sebi said. PTIBJANU.
This is unedited, unformatted feed from the Press Trust of India wire.