The Securities and Exchange Board of India is considering allowing mutual funds to invest in commodity derivatives, thus opening up a new avenue of investment for the mutual funds industry.

Asset management companies have been pressing the market regulator to allow them to invest in commodity futures, where the volumes are picking up.

The industry, under the umbrella of the Association of Mutual Funds of India, has been making a concerted pitch to the regulator to allow them to invest in instruments outside equity and debt.

Sebi officials said in view of the industry's demand, they were prepared to allow funds to invest in commodity futures, provided there were appropriate internal regulations and risk management measures in place. Industry sources said risk management systems were being put in place in collaboration with Amfi.

Meanwhile, SBI Mutual Fund recently submitted an offer document to the regulator for approval, prior to launching its Magnum Commodity Fund. A main objective of this fund is to invest in commodity-linked derivative instruments.

SBI Mutual Fund executives said in the absence of regulatory approvals, they would be investing in stocks of commodity companies.

Industry sources said investing in commodities would allow them to hedge among the various markets. "At present, we can hedge only on our equity and our debt exposures in the cash segment. But we want to get to a point where can we take hedges on the calls, which we take on the equity segment as a whole," said a fund manager.

The two Mumbai-based commodity exchanges, the National Commodities and Derivatives Exchange and the Multi-Commodity Exchange, clock daily volumes of Rs 1,000 crore (Rs 10 billion) each a day on an average.

The three national exchanges (the other is the Ahmedabad-based National Multi Commodity Exchange) together account for around 55 per cent of the total turnover of the domestic commodity exchanges.

The Reserve Bank of India has not allowed mutual funds to invest in gold, but fund sources said that Sebi can take an independent decision so far as trading in commodity derivatives is concerned.