The Hindu Business Line : `Short-term FDs for meeting possible additional margin requirement'

JM Mutual Fund is in the eye of a minor storm, thanks to a rather severe exposure to FDs through the newly-launched JM Equity & Derivative Fund. Mr Krishnamurthy Vijayan, CEO, fiercely justifies the allocation.

"By definition, we can not take uncovered exposures to the equity market. And by regulation, we can not take uncovered exposure to the futures market either", he says, adding that at least 50 per cent of the scheme's assets will normally remain in short-term debt instruments and bank deposits. Excerpts:

How do you defend such a heavy investment in FDs?

The fund has to keep about 20 per cent in futures as `margin money'. This amount has to be deployed in bank FDs. As and when the stock exchange requires (based on market volatility), additional margins may have to be placed. So if we have Rs 500 crore equity exposure, roughly Rs 500 crore plus profits will be our futures exposure. That means, margin money will be around Rs 100 crore.

As a risk management measure, we also keep an almost equivalent amount in very short-term FDs for meeting possible additional margin requirement. For the rest, the funds will be in short-term (sub one-year) debt or money market instruments.

Do you think this will help meet the fund's investment objective?

Yes. Since a fundamental attribute of JM E&D Fund is its investment in derivatives, we will have to put money in FDs. Usually this will be with our clearing member - HDFC Bank. We may choose other banks if we get better rates. Placing money in deposits to the extent of margin money/additional margin money requirement is necessary for meeting the fundamental attributes of the scheme.

Remember, direct arbitrageurs place shares as margin, but for mutual funds, there are potential risks that fund managers may not prefer to take.

In view of the fact that SEBI may impose restrictions on MFs investing in FDs, will your investment strategy be affected?

As I said, for the exchange, these are an acceptable form of margin money deposit. To be able to deal in futures, we will have to continue with our policy unless some other mechanism evolves in course of time.

To the extent of margin money/additional margin money requirements, our investment strategy will not change.

Is there any steam left in the equity markets?

Firstly, at current levels, the market is trading at around 12 times the forward earnings forecast for 2006. This compares favourably with the earlier times when the market had reached all-time highs before consolidating.

As such, we strongly believe that the current levels just represent a take-off stage for the levels that the indices should reach in the next 3-5 years.

Secondly, India seems to have come into her own economically. Though we do have miles to go, we are still poised to become an economic power. This is reflected in the international ambitions and growth plans of many of the Indian companies that we talk to and hear about.

I personally believe that corporate India is moving ahead with unprecedented speed and confidence. All this will be reflected in the markets.

It pays to remember that any call on the market is fraught with the risks of crystal ball gazing.

Also, a word of caution for investors: Short-term investing is not for the weak-hearted.

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