Green signal! Sebi gives nod to mutual funds to invest in exchange traded commodity derivatives with investment limits

Markets regulator SEBI today allowed the much-awaited mutual fund's entry into commodity derivative market trading. However, it has not allowed investment in physical goods. Experts feel that asset class will also enter as they will have new avenue for investment, adding that this is positive news for investors. Mutual funds are now allowed to invest in exchange traded commodity derivatives, except those on 'Sensitive commodities', according to Sebi. 

In order to propel the participation of mutual funds in the commodities market, SEBI has allowed them to invest in Exchange Traded Commodity Derivatives (ETCDs) with certain limits. In a circular, Sebi said that ''No Mutual fund schemes shall invest in physical goods except in ‘gold’ through Gold  ETFs''.

"Mutual  fund  schemes participating in ETCDs may hold the underlying goods in case of physical settlement of contracts,in  that  case mutual funds shall dispose of such goods from the books of the scheme,at the earliest, not exceeding 30 days from the date of holding of the physical goods" SEBI said.

Sanjit Prasad, MD and CEO, ICEX said, 'Allowing Mutual Funds to participate in exchange-traded commodity derivative is a progressive step taken by the regulator in the right direction. We believe the participation of Mutual Funds will add depth and liquidity to the Indian commodity derivatives market. The entire market eco-system will be immensely benefited.'  

Prior to trading in ETCDs, Sebi asked AMCs to appoint a dedicated fund manager with requisite skills and experience in the commodities market (including commodity derivatives market). 

They should also appoint a custodian registered with the board for custody of the underlying goods, arising due to a physical settlement of contracts. The circular further added, AMCs shall not onboard foreign portfolio investors (FPIs) in schemes investing in ETCDs until FPIs are permitted to participate in ETCDs, Sebi said. 

Investment limit 

1. Mutual fund schemes shall participate in ETCDs of a particular goods (single), not exceeding 10% of net asset value of the scheme. However, the limit of 10% is not applicable for investments through Gold ETFs in ETCDs having gold as underlying.

2. In case of multi assets allocation schemes, the exposure to ETCDs shall not be more than 30% of the net asset value of the scheme.

3. In case of other hybrid schemes excluding multi assets allocation scheme, the participation in ETCDs shall not exceed 10% of net asset value of the scheme.