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Tuesday, May 04, 2004

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Mutual funds looking at investment in commodities

Veena Venugopal

Mumbai , May 3

FED up of investing in the same old mutual fund products? Perk up; soon mutual fund investment options would include gold, silver, coconuts, pepper, soyabean and other commodities.

The Association of Mutual Funds in India (AMFI) is studying the implications and methodology of offering mutual funds that would invest in commodities instead of equity, debt and money market products. ``This is a necessary diversification that investors in funds need. The commodities markets are also not as saturated as the capital and money markets. These funds would deliver risk diversification as well as high rates of returns to investors,'' said Mr A.P. Kurien, Chairman, AMFI.

``We would study the ramifications and wider implications of offering these products and present our report to the management committee of AMFI within 2-3 months. If we can get the regulatory go-ahead, India would be one of the first countries in the world to offer these investment options,'' said Mr Sanjiv Shah, Executive Director, Benchmark Mutual Fund and the Chairperson of the AMFI committee.

Incidentally, Benchmark Mutual Fund has been awaiting clearance to introduce its gold fund (Gold BeES) from the Securities and Exchange Board of India for nearly two years now.

Commodity markets and futures experts feel that mutual fund products in the sector are too complicated to be successful.

Existing players do not have product knowledge as far as investments in commodities derivatives are concerned. Construction of the portfolio would be crucial to the product and unless experts from various commodity markets are brought together, it would be a difficult proposition, according to a commodity markets' consultant.

Commodity exchange players feel that retail interest in mutual fund products would bring in much-needed funds and liquidity to the exchange.

Operational issues are expected to be a bigger hurdle for mutual fund houses. Even though most of the trades would be on a cash settlement basis, in case the fund manager is forced to take delivery, the mutual fund house would need storage and warehouse facilities for these commodities, especially perishables.

``Gold as an investment product is well understood by Indians. We would use this as a starting point and look at the structures prevalent internationally and the areas where changes in guidelines would be required,'' said Mr Sourabh Sonthalia, Head of Strategy & Business Development, DSP Merrill Lynch Fund Managers Ltd and a member of the AMFI committee.

``We are confident of the viability of this model,'' says Mr Kurien. If he is right, coconut, pepper and soya would spice up your bank balance just as well as it does your favourite dish.

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