SEBI’s move to allow mutual funds, PMS in commodity trading a masterstroke; here’s why

Published: March 13, 2019 12:15:41 PM

Globally, total commodity asset under management has crossed USD 300 billion and India’s contribution to this is anything but negligible.

mutual funds, MF, debt mutual funds, debt funds, debt MFs, Securities and Exchange Board of India, SEBI, new SEBI guidelines on debt mutual funds, IL&FS crisis, rating agencies, AMFI, AMCs, Mutual Fund sahi haiThe commodities markets have had a strong speculative aspect to them since the beginning.

:- By Sandeep Jain

Globally, total commodity asset under management has crossed USD 300 billion and India’s contribution to this is anything but negligible. In most parts of the world commodity derivative indices are traded by institutional investors, however, India is just getting started.

Despite the fact that commodity derivative markets have been functioning now for decades, most retail investors have maintained arms-length from this asset class. Gold and silver have been the only two commodities Indians have heavily invested into owing to a deep-rooted cultural practice.

With SEBI making it possible for mutual funds and PMS to trade in commodities, a significant step has been taken to help retail investors leverage returns from this asset class in a safer manner. This is possibly the masterstroke that could turn tables for the markets.

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The commodities markets have had a strong speculative aspect to them since the beginning. Globally, commodities have increasingly become a significant part of the asset allocations of institutional investors.

These investments in commodities take a variety of forms, including those in precious metals, agricultural products, futures, indexes and hedge funds. In portfolio management commodities can serve a variety of functions from volatility and/or inflation hedges to purely speculative plays.

It is to be noted with utmost importance that now with MFs and PMS been provided a route into the commodity space in India, there is still need to bring in further efficient and representative indices for the purposes of trade and hedging. It is imperative to build on indices which would allow for long and short term investments and help investor’ benchmark commodities across categories on real time basis.

Industry had been seeking participation of MFs and PMS in commodity markets for a long time and now clearing the path for such institutional investors, regulator SEBI has taken a major step in deepening and providing more liquidity, helping hedgers with better mechanism for price discovery and managing price risk.

Being one of the largest consumers of commodities like Gold, Oil and steel as well biggest producer of various agriculture products in the world, entry of MFs and PMS into the markets will help bring in products like exchange traded fund in more commodities, index derivatives and options in agriculture commodities.

Needless to say participation of mutual funds and PMS in commodities trades will enable investors to leverage the asset class under professional guidance and through structured product.

The inroads, mutual fund industry has made in equity markets is now well known, making it one of the most preferred investment vehicles for retail clients. The AUMs of Indian MF industry grew at a notably higher compounded annual growth rate (CAGR) of 27% from FY13-14 to FY17-18 and during FY18-19, it grew to Rs 22.85 lakh crore as of December 2018, registering 7% growth over March 2018. A similar trend in commodity derivative, even though now a long journey away, seems plausible now.

The author is Managing Director and Portfolio Manager at IndiaNivesh. The views expressed are author’s own.

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