A SEBI-appointed committee is deliberating on whether mutual funds can launch a separate category of actively managed funds that invest fully in commodities via exchange traded commodity derivatives (ETCDs).
In 2019, SEBI had allowed MFs to participate in ETCDs, which are standardised agreements traded on regulated stock exchanges. For multi-assets schemes, the exposure to ETCDs was capped at 30 per cent of the net asset value of the scheme. The cap for other hybrid schemes was 10 per cent.
MF investment in ETCDs is estimated to be under ₹10,000 crore. Other than ETCDs, MFs can currently invest in commodities through gold and silver ETFs, that require a physical backing of the commodities, and through gold and silver fund of funds.
“There are opportunities to make returns in the segment. Commodities have performed better than arbitrage funds several times in the past few years,” said an MF official.
- Also read: Optimism in global commodities market over Chinese measures may be short-lived, say analysts
According to him, investors will be able to make money if the regulator allows the schemes to hold net long positions of 10 per cent. The commodities schemes can be allowed to take a gross exposure of up to 30 in a single commodity, of which 20 per cent has to be hedged and the rest 10 per cent can be naked or net long positions, he said.
Someone who buys a commodity futures contract is said to be ‘long’ on the contract.
“The problem with ETCDs is that there are limited commodities where there is enough liquidity. If you put a 10 per cent condition for gross exposure, the scheme will have to invest in at least 10 commodities, which can be a challenge. With the 30 per cent gross exposure in a single commodity, there will be a minimum of four commodities in the portfolio,” he said.
Gold, silver, castor oil, aluminium, copper and zinc are some of the more liquid commodities.
Metal play
The industry has sought relaxation on the time period for disposal of physical commodities such as metals. “Since metals are not perishable we have requested SEBI to allow more time for their disposal. Traders typically continue to hold the physical commodity till its final expiry, which can be 2-3 years,” said the official.
According to current norms, MFs participating in ETCDs can hold the underlying goods in case of physical settlement of contracts. However, the funds have to dispose such goods by the immediate next expiry day of the same contract series or within 30 days of holding the goods.
An email sent to SEBI did not immediately get a response.
Types of trades
There are two types of trades in commodities. One is calendar spread, which is similar to arbitrage. The other is directional trade, which involves taking naked positions.
A calendar spread involves buying of a derivative of an asset in one month and selling a derivative of the same asset in another month. For example, one could buy near-month futures contracts of aluminium and sell far-month futures contracts of the same metal.