Despite the strong history of commodities trading in the country, commodities have received little exposure as an asset class among retail investors, investment advisors and wealth managers alike. The only commodities that Indians have considered as investment options are gold and silver, thanks to the deep-seated cultural belief about the virtues of these metals. The mutual fund industry has proposed innovations like the Gold Fund that enables investors to invest in Gold ETFs even without a Demat account. However, Gold ETFs have faced significant operational difficulties in the procurement of physical gold from hoarders and custody expenses for its secure storage; though that is the very reason they make an attractive investment option for everyday investors.
Though often negatively correlated with returns on stocks and bonds, commodity asset class can help diversify a portfolio offering protection against future uncertainty. Commodities are perceived in the aggressive, but prudent judgement backed by solid research before investing can significantly offset risks.
Globally, total commodity assets under management (AUM) touched $311 billion in December 2017, up $45 billion from a year earlier, and should continue to rise with a weaker US dollar and continuing global growth. However, investor participation in commodities has not taken off in India to the same extent. One problem has been the absence of investable indices, through which investors can participate in commodities trading. Another challenge has been the regulatory restrictions regarding the participation of mutual funds in exchange-traded commodity derivatives, and the ensuing participation of retail investors in this market.
However, in a fillip to the industry, the Securities and Exchange Board of India (SEBI) has recently allowed category-III AIFs to participate in the Indian commodity derivatives market. SEBI is also considering permitting mutual funds (MFs) and portfolio management services (PMS) to participate in exchange-traded commodity derivatives. Allowing MFs and PMS to participate will help broad-base the commodity derivative segment and improve liquidity. These measures should drive growth in the commodities market, as more Indian investors come to see them as a viable option to diversify their portfolio.
The Indian commodity derivatives market has been running without any institutional participation, thus, lacking the desired liquidity and depth, which is one of the key elements for the efficient price discovery and price risk management. As proposed by SEBI, there are different routes like separate dedicated schemes, exchange traded funds or commodity arbitrage funds through which mutual funds could participate in commodity derivatives. As investors’ confidence in the buy-side industry continues to grow, the regulator is also helping open up new avenues, which will further assist the industry and ensure better, risk adjusted returns for the customers. Mutual funds and portfolio management service providers could become a key part of the commodity derivative ecosystem, having the capability to offer safe and research-backed, index-tracking products to common investors.
Similarly, investable commodity indices, launched in September 2017, will make it simpler for investors to participate in commodity markets. SEBI has also approved a universal exchange, potentially bringing together the domains of equity and commodity exchanges.
With SEBI allowing institutional investors access to commodities derivatives, investors will be able to leverage these indices not only to benchmark performance but to also build more sophisticated products. Commodity index-based products will allow market participants to trade and invest in commodities on a short and long-term basis. These indices will help investors effectively benchmark commodities across categories in real-time to make efficient investment decisions and validate their investment decisions.
(By Aniruddha Chatterjee, Head-Buy-Side business, Thomson Reuters South Asia)
(Disclaimer: These are the views of the author and not of Financialexpress.com. Readers are advised to consult their financial advisors before making any investment)