ICICI Prudential MF has filed an offer document with Securities and Exchange Board of India (SEBI) to launch ICICI Prudential Oil Fund.
It will be an open-end debt fund which would be investing in oil linked debentures which would be created by investment banks wherein these debentures will provide coupon (returns) linked to oil prices.
It would be the first oil fund available to domestic investor. The aim of the fund manager would be to invest 80 per cent of the total assets in the oil price linked foreign debt securities. The fund can hold 20 per cent of the debentures till maturity.
The debentures are going to track an index that would mirror the prices of West Texas Intermediate (WTI). The New York Mercantile Exchange’s (NYMEX) division of light, sweet crude oil futures contract which is WTI, is the world's most liquid forum for crude oil trading apart from being the world's largest-volume futures contract trading on a physical commodity.
However, the fund if its sees light of the day will bear three key risks. One, the credit risk of the debenture issuing investment bank. Two, currency risk as exchange rates will have a bearing on the value of this forex denominated asset. Three, the basis of its call. If the fund buys at a point after which oil price fall the fund will lose. And oil being a volatile commodity will be extended to the fund. The crude oil prices at $79.55 per barrel as on October 27 has gained 134% from its low of $34 on February 12, 2009.
Since the debentures would be mounted on crude oil prices, its volatility could very well the issuer off guard and hence there is a liquidity risk as well. Last and not the least, there is always an exchange risks factor looming large. As the trade would be done in foreign currencies, fluctuations in the prices would have an impact on the coupon (returns).