The Hindu Business Line : MFs gear up for commodity products — Exercise may begin with gold; SBI Mutual submits draft offer

MUTUAL funds that invest in commodity derivatives are almost at investors' doorsteps. Several fund houses are in the process of finalising products for launching their commodity funds. In fact, SBI Mutual Fund has already submitted a draft offer document for its Magnum Commodity Fund to the Securities and Exchange Board of India (SEBI).

This first-of-its-kind product is mandated to invest up to 100 per cent of its assets in commodity-based derivative instruments. Commodity-linked mutual funds are expected to start off with investment in gold. Subsequently, other commodity derivatives will be included. There is an inordinate amount of excitement about launching commodity funds, primarily because of the spectacular returns some commodities (like gaur) have posted. Also, the industry is looking to diversify from regular equity and debt products, said an industry insider.

The investment objective of SBI MF's scheme will be to generate opportunities for growth along with the possibility of consistent returns by investing in a portfolio of commodity-linked derivative instruments (subject to regulatory clearance); as also stocks of companies engaged in commodity business without actually investing in physical commodities, according to the document filed with SEBI.

The fund manager will have the discretion to allocate the investments among various instruments — equity/debt, including derivatives — based on his assessment of the commodity market prospects and in the overall interest of the unit holders.

Other fund houses are also expected to announce their commodity funds shortly. "We may start out with a watered down commodity derivative-based product, but once we gain enough experience, we would launch full-fledged products. We are currently in the process of hiring commodity experts who will manage these products," said the head of marketing of a large fund house.

Meanwhile, the Association of Mutual Funds in India (AMFI) is finalising its report on the methodology in which funds would invest in commodities.

Members of AMFI had a meeting on Monday to discuss the draft report, said Mr A. P. Kurien, Chairman, AMFI. "The meeting was also attended by the heads of the commodity exchanges. Based on the issues raised by several members, the report is under re-work now and will be ready in a month's time," he said.

The major hurdle seen in introducing these products is in taking delivery of the underlying commodities. Even though the delivery of certain commodities can be taken in a demat form, there are still some operational details that would need to be worked out.

SEBI's regulations would also have to be altered in view of the addition of this new asset class. Currently, these regulations allow for investments only in securities — debt, equity and money market instruments.

SBI MF's offer document includes the caveat that until the clearance from SEBI is not obtained, the fund would restrict its investment only to stocks of companies engaged in commodity business and in debt and money market instruments.

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