Can Commodity Derivatives Be A Good Avenue For Mutual Funds? Find Out Here…   Oct 07, 2016

October 07, 2016
Weekly Facts
Close Change %Change
S&P BSE Sensex* 28,061.14 195.18 0.70%
Re/US $ 66.70 -0.15 -0.23%
Gold Rs/10g 30,020.00 -1,135.00 -3.64%
Crude ($/barrel) 51.00 2.99 6.23%
F.D. Rates (1-Yr) 6.00% - 7.50%
Weekly changes as on October 06,2016
*S&P BSE Sensex value as on October 07,2016

Buying castor oil is uncommon for personal use as it's a non-edible oil with heavy commercial applications in industries such as pharmaceuticals and personal care. However, commodity traders love castor seeds as India commands close to 2/3rd of share in the international market for castor oil. Those who track Indian commodity markets closely may recollect, the National Commodities and Derivatives Exchange (NCDEX) was forced to freeze all future contracts in the castor seeds in January 2016. Although the Exchange stated that the move was made to safeguard the interest of the commodity market, its calling off all trades with immediate effect, however, exposed the speculators' play in the future contracts. And this wasn't the only instance of a commodity market fiasco. Before that, the National Spot Exchange fraud had forced the Government to merge the Forward Markets Commission (FMC) with SEBI in 2015.

Changing times…
This was the state of India's commodity derivatives market until recently. Surprisingly, the latest development is—the Securities and Exchange Board of India (SEBI) plans to permit mutual fund houses to invest in commodity derivatives, as well as rope in other institutional investors such as banks and insurance companies. Well, this isn't to say that, the market regulator hasn't made any attempt to improve the situation before approving such a radical step.

The regulator has been tightening the grip...
Between January 2016 and now, the market regulator has taken a number of measures to strengthen the risk management systems and the surveillance mechanism at various stages. Lately, Mr Rajeev Kumar Agarwal, in charge of commodities derivatives and full-time member at SEBI briefed the media about it's work to improve the functioning of commodity derivatives market in India. He said, "SEBI followed a multi-pronged approach. It examined the issue from the angle of systemic risk, governance of the exchange, market integrity and investor grievance. A task force was set up to examine systemic issues, including risk management at exchanges. The board of the exchange was advised to fix responsibility if there have been any lapses in risk management and an interim order debarring 22 entities was passed to take care of market integrity aspect. NCDEX also has been directed to address grievance and facilitate the sale of stocks of those who were on sale side and did not get the opportunity to give delivery and to consider monetary compensation."

After raising the bar on regulations for commodity derivatives market, SEBI now aims to increase the competition among various commodity derivatives and break the monopoly of any commodity exchange. The SEBI has already indicated that it would follow the cautious approach to the further development of commodity derivatives market.

PersonalFN is of the view that SEBI's intent to allowing mutual funds to invest in commodity derivatives seems to be targeted at deepening the market and discouraging the speculation. The entry of large players may not only help improve the liquidity but will also maintain the equilibrium to avoid the replay of the "castor oil" episode. Having said that, mutual fund schemes based on the commodity derivatives may not be suitable for the retail investors. Derivatives on various agricultural and non-agricultural commodities primarily help the industry and farmers to safeguard their positions from the adversities arising out of price volatility.

Should you say "NO" to commodity derivatives funds?
Commodities such as castor oil, soybean oil, and crude oil among others have more industrial applications and hardly play a direct role in common man's life. Commodities are cyclical in nature and thus fall in the "very high risk-high return" category for investors. PersonalFN is of the view that before permitting mutual fund houses to launch any commodity-based funds for retail investors, SEBI should test how commodity derivatives market operates under these newly adopted regulations. Premature entry of mutual fund houses in a volatile dangerous territory of commodities may further dampen investors' confidence. It is noteworthy that fewer than 5% Indians invest in mutual funds.

Despite robust regulations for equity exchanges and market participants, mis-selling of mutual funds and price manipulations in stocks happen even today. When compared with the sophistication and maturity of regulations for equity and bond markets, those for commodity markets are in a juvenile stage.

PersonalFN believes, retail investors should welcome this move with a lot of caution.

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It becomes painful when you have to struggle to claim your own hard-earned money. Until recently, removing money from your Employees' Provident Fund (EPF) or transferring your existing account from an old employer to the new employer was an irksome process. The most uncomfortable part was that any such transfer or withdrawal needed the authentication of and attestation by the previous employer. Those of you who might have switched your jobs recently would agree with this. However, here is some good news. Employees' Provident Fund Organisation (EPFO) has simplified the processes for transfer as well as the closure of EPF accounts.

For withdrawals, no authorisation required by your previous employer now
If you have an activated Universal Account Number (UAN) and have complied with the Know Your Customers (KYC) norms your job is half-done. Please keep in mind, the Bank Account number along with IFSC is compulsory, and Aadhaar or PAN are necessary wherever issued to a member for KYC.

Once you check this, you may then just have to fill up UAN based Form 19 (a withdrawal form), sign it duly and courier/post it to the regional EPFO office. In this entire process, you don't have to communicate personally with your previous employer to fulfill any formality. Moreover, the EPFO is mulling over establishing a system for the online submission of withdrawal requests, which will help quicken the settlement process.

What to do for transferring the account?
For the transfer too, the process is hassle free nowadays. First, you need to log into the dedicated website of EPFO that handles the transfer claims. And then, you should check whether your account is eligible for the online transfer option. If it is, follow the easy steps, punch in the details, and submit the form. You still need employer's authentication but getting it is not your responsibility now, as the employers (present and previous both) also get intimation, along with the central and regional EPFO office. This increases the accountability of both—the companies and the regional EPFO office.

But think before withdrawing money from EPF ...
PersonalFN is of the view that, retirement savings are supposed to be utilised only during your golden years. Therefore, PersonalFN discourages readers from making premature withdrawals from their EPF account. Yet, if you want to close the account before retirement and pull out savings for an emergency or otherwise, you may. However, please consider the tax implications.

PersonalFN also believes your retirement planning has to be comprehensive and you can't just rely on EPF savings. If you are serious about building your retirement kitty, you may like to try the unbiased retirement planning services offered by PersonalFN.

For the first time in the history of RBI, Monetary Policy Committee (MPC) took a decision on policy rates at the third bi-monthly policy review meet held on October 03, 2016. A panel of 6 members reached a consensus, without any contrary view, to lower repo rates by 25bps (basis points). MPC's policy action seems to have hit many experts and market participants like a ton of bricks. By and large, economists and expert commentators were expecting RBI to maintain the status quo , citing the upside risks to inflation. Surprisingly, the central bank slashed the repo rate to 6.25%--a 6-year low.

Background to the third bi-monthly monetary policy...
Over last 2 quarters, global growth has been stunted under the pressure, and trade volumes have declined considerably, posing a further downside risk to the growth. Industrial activities in advanced economies have substantially weakened, giving rise to protectionism in some developed world economies, threating to diminish trade volumes. Despite rising crude oil prices, inflation in the advanced economies remains benign, and the emerging markets have begun to cool off.

Speaking about the domestic economy, a healthy monsoon this year has significantly boosted agricultural activities. Except for the Sugarcane, Jute, and Mesta, this season the sowing has been higher than last year's acreage. As per the primary Advance Estimate of Kharif foodgrains, production for 2016-17 is likely to be 11.02 million tonnes higher (at 135.03 million tonnes) than the last year's Kharif foodgrains production of 124.01 million tonnes. Among all important categories, rice, maize, and pulses are likely to see a record-high production this season, which may raise the overall food grain production to a new high as well. In contrast, industrial and manufacturing activities witnessed a lull in Q2, reflecting in the Index of Industrial Production (IIP) numbers. Having said that, RBI's industrial outlook survey suggests that the expansion projections/expectations of corporations have remained positive for Q2 and Q3.

To read more about this story and Personal FN's views over it, please click here.


Last week, India's globally tracked stock market index, S&P BSE Sensex registered a loss 2.8% (802.26 points). This might look quite ordinary considering the valuations we are trading at. However, out of this uncommon fall, we witnessed the downward movement of 465 points, within a nanosecond of India formally announcing the surgical strikes in Pak Occupied Kashmir (PoK). Out of India's top 10 most valued companies, 9 collectively lost Rs 57,065 crore worth market capitalisation last week, as reported by the Economic Times dated October 02, 2016. In other words, half the decline happened as soon as markets feared a further escalation of the situation and investors withdrew funds from India's most valued companies.

Why aren't Indo-Pak tensions shaking markets now?
As the Government of India has taken a tough stand against Pakistan, exploring all alternatives to isolating it on the global landscape, Pakistan has gone into face-saving mode. On the other hand, India has shown its agility and preparedness for adversities by keeping troops ready and evacuating people from the villages located near borders. It is no wonder then that markets started the following week on a positive note with indices faring in green. This happened even when the terrorists opened fire on the Indian Army base in Kashmir, and Indian Army retaliated strongly. Since, Pakistan is still operating through proxies, the fear of full-fledged war breaking out has receded. Even the reports of China, a close ally of Pakistan, blocking the flow of a tributary of the Brahmaputra in Tibet haven't affected the market sentiment.

At the time of writing this article, an advance decline ratio of the companies traded on BSE stood healthy at 4:1 i.e. for every 4 stocks advancing there was only 1 stock declining. All these indicators suggest that equity markets have probably looked past the heavy fall of last week. As long as tensions between India and Pakistan do not show adverse economic implication on India's prospects or relations between India and China do not deteriorate, markets are unlikely to see any major commotion.

To read more about this story and Personal FN's views over it, please click here.

Brushing aside contrary voices among the Central Board of Trustees (CBT), the Labour ministry has decided to increase the equity component to 10% (from 5% last fiscal) in EPF investments. The EPF is expected to witness incremental inflows of Rs 1.3 lakh crore in FY 2016-17, of which Rs 13,000 would be earmarked for equity investments. In the previous financial year, the EPFO had invested a little over Rs 6,500 crore in equity. So far, the investments are being made passively through Exchange Traded Funds (ETFs).

How it goes down with the trade unions remains to be seen.

Derivative: A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
(Source: Investopedia)
Quote : "Investing is the intersection of economics and psychology"- Seth Klarman


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