With the launch of Tata Multi Asset Opportunities Fund, Tata Mutual Fund has opened up a new source of returns for Indian investors - commodities arbitrage. In May 2019, markets regulator Securities and Exchange Board of India (SEBI) had allowed mutual funds to invest in exchange traded commodity derivatives. This can be done up to 30% of the scheme’s assets with no individual commodity exceeding 10% of the scheme's assets (gold funds are not subject to these caps for gold).
Tata Multi Asset Opportunities Fund will invest 10-25% of its assets in commodities (including commodity derivatives) and seek making money from an arbitrage trade in commodities. The new fund offer (NFO) of the scheme opened on 14 February and will end on 28 February. Being an open ended fund, you can also invest in the fund after the NFO closes.
Tata Multi Asset Opportunities Fund will invest 65-80% of its assets in equity, 10-25% in debt and 10-25% in commodities. Unlike other multi-asset funds in existence, this fund will take its commodity exposure through derivatives along with through Exchange Traded Funds (ETFs). The latter only invest in one commodity - gold, limiting the spectrum of commodities that existing funds have access to.
Aurbinda Prasad Gayan, head, commodities strategy at Tata Mutual Fund emphasised that the commodity allocation in the fund is geared primarily towards commodity arbitrage.
“One form of commodity arbitrage is benefiting from the spot and future price differential of a commodity. This differential is affected by factors such as cost of carry which in turn includes warehousing cost, interest rates and supply-demand dynamics. These factors allow a higher return to be generated from commodity arbitrage than what is possible in equity arbitrage," Gayan said.
At present, arbitrage funds deliver a return of 5-6%.
“Commodity derivatives also allow us to participate in a host of commodity markets including precious metals, oil and even agricultural commodities. This is a broader spectrum than just buying gold. Also, the arbitrage strategy is a low risk approach to commodity investing than a naked exposure to any commodity," Gayan said.
“The concept looks attractive. At one time, even equity arbitrage returns were very high. These came down as the market matured. However, I would wait until the fund develops a track record and shows evidence of unique skill," said Vijai Mantri, co-founder and chief investment strategist, JRL Money.