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MF News Oil ETFs, silver ETFs to be reality soon

Oil ETFs, silver ETFs to be reality soon

Fund houses awaiting clarity from SEBI to launch commodity ETFs.
Team Cafemutual Mar 10, 2019

Last week, SEBI has allowed fund houses to come up with commodity mutual funds and PMS.

Currently, mutual funds can only invest in gold. The new regulation opens doors for investment in other commodities such as precious metals (silver and platinum), natural resources (oil and gas, iron, copper) and food crops.

Globally investments in ETF are either in a single commodity or in a basket of commodities. ETFs may hold the commodity in physical form if it can be stored like gold. In case of commodities, which cannot be stockpiled such as oil and gas, the ETF invests in the futures contract of the commodity. Some ETFs also track prices of a commodity index.

The world over, ETFs investing in a basket of commodities have seen more traction than single commodity ETFs in the recent years. Overall, gold and crude oil tend to be the most popular commodities for investment.

Oil ETFs have high demand, as oil is one of the most essential commodities in modern times. Gold being an inflation hedge and store of value has also seen high investor interest globally.

While both leveraged and non-leveraged ETFs are present globally, it is unlikely that the regulator may allow leverage in commodity ETFs in India.

Chirag Mehta, Senior Fund Manager, Alternative Investments; Quantum Mutual Fund expects oil and silver ETFs to be launched in the first round. “Demand for silver is high in India. Oil, meanwhile, is also popular, as our economy is heavily reliant on crude oil. However, we need to wait for the fine print to ascertain where exactly can mutual fund invest, and what structures can be developed,” he said.   

Arun Sundaresan, Co-Fund Manager (Quant Fund) & Head – Product Management, Reliance MF expects these products to be a good diversification tool for retail investors who otherwise may not be able to invest in commodity markets. He is awaiting further clarification from the regulator to understand the possible portfolio structure of these funds.

Based on the fund house’s earlier experience in launching a global commodities fund, Swarup Mohanty, CEO, Mirae Asset MF feels that commodities are not ideal for retail investors, as commodities tend to be volatile assets. They are more suited for evolved investors who understand the risks associated with them, he said.

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