With SEBI’s nod to mutual funds to invest in exchange-traded commodity derivatives, Tata Mutual Fund is set to launch its own commodity fund in which a portion of the investor money will be invested in derivatives of commodities including gold, silver, energy and agri commodities. In an interview with BusinessLine , Aurobinda Prasad Gayan, Head - Commodities Strategy, TATA Asset Management, talks about the features of the fund which is now before the Securities and Exchange Board of India (SEBI) for approval. Excerpts:

SEBI has allowed MFs to start investing in commodities. What guidelines have the regulator given in terms of investment limits?

The guidelines were announced in May allowing mutual funds to participate in exchange-traded commodity derivatives (ETCDs) through hybrid schemes including multi-asset schemes. Until then, mutual funds could launch only gold-based funds. So, there is now an array of investment opportunities before fund managers and investors.

In terms of investment limits, the guidelines allow exposure of up to 10 per cent of the net asset value of the scheme in case of MFs participating in ETCDs of a single asset. For multi-asset allocation funds, where there is exposure to more than one commodity derivative, the limit is 30 per cent. Under gold ETF (exchange-traded fund) schemes, fund houses can also participate in gold derivatives and other products.

What would be the features of the commodity-backed multi-asset fund that Tata AMC will be launching?

Subject to approvals from SEBI, TATA AMC (asset management company) may be the first multi-asset allocation fund in the industry with exposure to ETCDs. The fund will have a combination of three asset classes — equity, debt and commodities — through derivative instruments.

As far as the features of the scheme are concerned, it will be an open-ended fund with active asset allocation across the three asset classes. As a fund, we will have ‘long-only’ and ‘spread trading’ strategies across various commodities. The regulator does not permit mutual funds to have net short positions in any commodity. However, we might have short side exposure on commodities, at times, for risk management of the existing long trades within the guidelines of SEBI.

Mutual fund schemes participating in ETCDs cannot also hold the underlying goods in physical settlement of contracts. However, in the event mutual funds end up holding physical goods, they are required to dispose off such goods from the books of the scheme within 30 days from the date of holding of the physical goods.

We would be keen to explore investment strategies within the framework of these guidelines. While there may be some challenges, we are confident that it should be a significant contributor to the fund performance.

For the first time, commodity investment as an option has been opened for retail investors through the MF route. Do you think this will fit all retail investors, or are some risks to it that investors need to understand? Who should participate?

We think it is a very good step by the regulator — permitting mutual funds to participate in commodities derivatives. Till date, asset allocation funds could have only equity, debt and gold as asset classes, with commodity exposure limited to gold. The SEBI move has unlocked many investment opportunities for investors. To give you a perspective, the historical returns on commodities have been very attractive. Our internal research on the performance of a simulated model portfolio has shown promising results. We find that having commodities exposure in a portfolio along with equity and debt enhances the overall portfolio, albeit with nominal increase in the overall beta.

Also, to be very specific, we do not perceive major un-systemic risk to the scheme portfolio, while operational challenges with regards to commodities trade may take some time to normalise. We are confident that any initial issues will be managed by fund managers, AMCs, custodians and the regulator. We look forward to seeing larger participation in the scheme from both retail and institutional investors.

How much will be the fund management fee? Will it be the same as what you charge for your existing hybrid funds?

The fund management fee should be in line with the industry. Our expense ratios are competitive compared with industry peers, and we make all effort to remain competitive in terms of performance and cost of services.

What commodities will you be investing in?

As a fund house, we believe that investment opportunities are available across commodities that are permitted by SEBI, excluding the ‘Sensitive Commodities’ as identified by regulators from time to time. We will predominantly have exposure to industrial metals, energy and bullion, while some of the seasonal agriculture commodities may be part of the portfolio. We will actively manage the portfolio and keep changing the exposure depending on the available investment opportunities.

Do you see enough liquidity in commodity contracts for MFs to participate?

As far as metals and energy contracts are concerned, we see no difficulties in executing trade. The market is wide enough, and all these contracts are actively traded. In fact, many agriculture commodities are well-placed in terms of liquidity.

We will be watchful of the commodity’s trading volume and open interests, based on which it will form part of our portfolio.

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