With a view to promote institutional participation in Exchange Traded Commodity Derivatives (“ETCDs”) the Securities and Exchange Board of India (“SEBI”) has decided to permit mutual funds to participate in ETCDs.
As per the circular dated May 21, 2019 issued by SEBI, mutual funds may participate in ETCDs in India, except in commodity derivatives on ‘Sensitive Commodities’.
- Mutual fund schemes cannot invest in physical goods except in ‘gold’ through Gold ETFs.
- ETCDs having gold as the underlying, shall also be considered as ‘gold related instrument’ for Gold Exchange Traded Funds (Gold ETFs).
- The participating mutual funds holding underlying goods in case of physical settlement of contracts, must dispose of such goods from the books of the scheme within 30 days from the date of holding of the physical goods.
- No mutual fund scheme must have net short positions in ETCDs on any particular good, considering its positions in physical goods as well as ETCDs, at any point of time.
- Mutual funds may participate in ETCDs through Hybrid schemes including multi-asset scheme and Gold ETFs.
- Asset Management Companies (“AMCs”) must:
- Appoint a dedicated fund manager with requisite skill and experience.
- Appoint a custodian registered with the Board for custody of the underlying goods
- Have written down investment policy and valuation policies approved by the Board of the Asset Management Company and the Board of Trustees.
- Before investing in Gold Deposit Scheme (“GDS”) of Banks, Gold Monetization Scheme (“GMS”) and ETCDs having gold as the underlying, mutual funds are required to put in place a written policy with regard to such investments with due approval from the Board of the AMC and Board of Trustees. The policy must be reviewed by mutual funds, at least once in a year.
- AMCs must not onboard Foreign Portfolio Investors (FPIs) in schemes investing in ETCDs until FPIs are permitted to participate in ETCDs.
- Participation of mutual funds in ETCDs shall be subject to the following investment limits:
- Mutual fund schemes shall participate in ETCDs of particular goods (single), not exceeding 10 per cent of net asset value of the scheme. However, the limit of 10 per cent is not applicable for investments through gold ETFs in ETCDs having gold as underlying.
- In case of multi-asset allocation schemes, the exposure to ETCDs shall not be more than 30 per cent of the net asset value (NAV) of the scheme.
- The regulator also said that other hybrid schemes excluding multi-assets allocation scheme, the participation in ETCDs shall not exceed 10 per cent of NAV.
- The cumulative exposure to gold related instruments shall not exceed 50% of net asset value (“NAV”) of the scheme.
- Disclosures for mutual fund schemes investing in ETCDs:
- The NAVs of schemes must be updated by the AMCs on their website on a daily basis and on the website of Association of Mutual Funds in India (“AMFI”) by 09:00 a.m. of the next calendar day.
- The format of monthly and half yearly portfolio may be modified to reflect the investment in ETCDs.
- The total exposure to ETCDs shall be disclosed as a line item in the Monthly Cumulative Report (MCR) submitted by mutual funds.