SEBI has now elucidated the rules for commodity and equity trading for mutual funds.
In 2019, SEBI had permitted mutual funds to participate in exchange traded commodity derivatives (ETCDs) but the MF industry was awaiting more clarity on the hedging strategy that mutual fund schemes can deploy. In a recent circular, the market regulator has clarified that hedged or offsetting positions taken by a mutual fund scheme during a trade will not be considered while computing the gross exposure of ETCDs for the fund.
For instance, let us assume that a fund has taken delivery of one kilo of gold on an exchange. Now, the scheme can initiate a short position on that contract as long as the short positions do not exceed the 1 kilo quantum. The recent circular clarifies that this 1 kilo short position will not be computed as a fresh position.
An exchange traded derivative is a financial contract that is listed on a regulated exchange for trading. Exchange traded derivatives can be used to hedge exposure or speculate on a wide range of financial assets like commodities, equities and currencies.
SEBI further clarified that fund houses cannot write and sell options or purchase instruments with embedded written options in goods or on commodity futures.
The cumulative gross exposure through equity, debt and derivative positions including commodity derivatives cannot exceed 100% of net asset value of the scheme, said SEBI.
