The one area of investment that Indian investors don?t have a convenient shot at is crude oil. Elsewhere in the world, investors have various ways of venturing into oil-linked investments, but in India, the only way is through the trading of crude futures on commodity exchanges. However, this manner of oil-linked investments is ideal only for active traders and businesses that need to hedge against oil prices. For the lay investor ? who might want to put money into oil for the long term, without having to bother about the day-to-day price fluctuations of crude ? there is no viable means to do so. Up until now, that is.
ICICI Prudential has filed an application with the Securities & Exchange Board of India (Sebi) for a new fund, which is linked to international crude oil prices. The ICICI Prudential Oil Fund will be the first of its kind in India. Such funds are commonplace around the world, but Indian investors haven?t had access to such a fund as yet. This new fund aims to fill in this void.
The rudimentary premise of this fund is simple ? your invested money rises when oil prices rise and falls when oil prices fall. However, the structure of the fund is slightly complex. The fund is labeled as a debt fund, but this label has no meaning as such. The most logical way of running such a fund would be through investments in futures of indices linked to oil prices. But, Indian funds are not allowed to buy international index futures. Hence, this fund will invest in specially-created debt securities, structured in such a way that their total returns tracks oil prices closely.
More precisely, this fund?s returns will be based on the returns generated on the New York Mercantile Exchange by trading on the futures of West Texas Intermediate crude. In effect, this makes this fund a commodity fund, and not a debt fund. And as far as returns are concerned, investors can expect them to closely match oil prices. Of course, there will be some deviation due to costs and other factors, but on the whole, if oil prices go up by 10%, your investments in the fund will go up by 10% as well, a couple of percentages here and there.
That said, amongst the risks that this fund could face, the most obvious one is the crash in oil prices. When crude oil was at $30, it wasn?t thought of or discussed much, but now it is. The other risk associated with this fund is currency risk. The fund?s returns will be earned in US dollars and any movement in rupee-dollar pricing will have an effect on them. There could also be a credit risk posed by the institutions issuing the debt instruments based on crude prices.
Taking all of these aspects into account, it becomes obvious that this will be a specialty fund. An exotic niche fund, it shouldn?t be the core of any portfolio. While investing in it, an investor should take a call on how oil prices will behave in the coming times. A lot of factors affect oil prices, and one should be aware of them while investing in this fund. And to make sure your investments in this fund succeed, you should not only be aware of these factors, it?s imperative that you are right about them as well.
?Author is CEO of Value Research
