In a nutshell – Liquidity will eventually improve but it may take longer

This is a good step initiated by SEBI by allowing mutual funds and Portfolio Management Scheme (PMS) to trade in commodity derivatives. But there are still a lot of restrictions. For example, they cannot be net short in the market. Both must have dedicated personnel for commodities and that will add to cost. MFs can take delivery positions in commodities but cannot hold for more than 30 days. There are no such restrictions for PMS. Both MFs and PMS are barred from taking any commodity derivative positions in any commodities that are explicitly banned for trading due to their sensitive nature. These are mostly agri products that are in the negative list.

While the start is good, mutual funds may prefer to wait and watch considering that it will higher compliance and also higher costs. Also, there are too many restrictions for mutual funds to feely trade in these commodities. Commodity volumes have been weak since 2013 due to the impact of commodity transaction tax (CTT). But that is still a challenge. Permitting MFs into commodity derivatives will surely improve breadth and depth of the markets inn the longer run. However, in the short run, MFs may be more circumspect.