 "Equity MFs, Sebi, gold, silver, diversification, fund managers, mutual funds, investment strategy, asset allocation, comparison, precious metals")
Equity mutual fund (MF) schemes may soon get to invest in gold and silver, if market regulator Securities and Exchange Board of India’s (Sebi’s) new categorisation framework gets finalised.
Some believe this will provide fund managers greater flexibility to navigate market volatility during periods of uncertainty, while others say the move could introduce complexities, particularly with respect to comparison of scheme performance.
As of now, equity schemes have to mandatorily invest 65-80 per cent of the corpus in equities. The rest can be invested in a mix of equity, debt, Real Estate Investment Trusts (Reits), and Infrastructure Investment Trusts (InvITs). In a consultation paper on Friday (July 18), Sebi proposed bringing gold and silver into the asset mix.
The precious metal exposure, if allowed, will be optional for fund managers as it is in the case of other non-equity asset classes. The consultation paper has no mention on sub-limit on gold and silver investments.
"The regulator's intent is to provide more options to fund managers," said D P Singh, deputy managing director (MD) and joint chief executive officer (CEO) of SBI Funds Management.
"The previous scheme re-categorisation, which was announced in 2017, solved a lot of problems but also came with a lot of restrictions. The new rules, which include allowing gold and silver investments, will ease them to an extent. At present, there are fund managers who hold onto higher cash levels when the equity market is expensive. The option to invest in precious metals will come in handy for such fund managers," said Kirtan Shah, founder of Credence Wealth.
Currently, only hybrid funds can invest in commodities.
However, other experts believe that the inclusion of gold and silver will dilute equity exposure, making asset allocation more complex.
“If traditional equity or debt funds begin investing outside their core mandates, the distinction between categories becomes less meaningful. This could also limit the upside potential. For instance, an equity fund allocating a portion to debt or gold may no longer retain its full equity character," said Feroze Azeez, joint CEO, Anand Rathi Wealth.
"In addition, equity fund managers choosing to take gold and silver exposure may find it more difficult to outperform the benchmark. Comparisons across funds could also become problematic, given the asset-class variations in the residual portion of the corpus," he added.
The proposal to allow gold and silver exposure to equity schemes is among a wide range of changes proposed by the regulator to increase scope for innovation while curtailing multiple launches with overlapping portfolios. These include allowing fund houses to launch retirement fund-of-funds (FoFs) with a target maturity strategy, enabling them to attract long-term, pension fund-like money. In addition, fund houses managing over ₹50,000 crore in a scheme may be allowed to launch another scheme in the same category.
To prevent redundant launches, Sebi has introduced a 50 per cent cap on portfolio overlap between sectoral/thematic equity schemes and other equity schemes, excluding largecap funds.
"The steps proposed by Sebi have a positive intent. The inclusion of other asset classes such as gold and silver will provide fund managers with more diversification tools. Other provisions such as the 50 per cent portfolio overlap limits is understandable," said Vivek Rajaraman, executive director, head of domestic client advisory, Waterfield Advisors.
