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Sharvari Patwa

Mumbai, Dec. 22 The Securities and Exchange Board of India may be worried about FIIs punting in the derivative segment of the Indian stock market, but retail investors have not only taken to it just as avidly but also outrank every other category of investors.

At the National Stock Exchange retail investors accounted for nearly two-thirds of the derivatives turnover for October 2007, the latest month for which such data is available. They contributed 64 per cent to the turnover while proprietary trading broking members of the NSE accounted for roughly 25 per cent and institutional investors, both domestic and foreign, came a distant third with around 11 per cent.

This is not a one-off phenomenon as the data for the earlier months too showed retail investors’ contribution hovering around these levels.

“Typically, retail investors take higher risk, although their quantum (of investment) may be small. Also, they do intra-day trading leading to higher volumes,” said Mr Sailav Kaji, analyst, PINC Research. Also, the fact that investors need put up only a fraction of the contract value as margin money makes it easier for them to take large exposure.

When asked as to why mutual funds are not trading in the derivatives segment all that much, Ms Anita Gandhi, Head of Institutional Business at Arihant Capital Markets, said, “Institutional investors like mutual funds can do it only to the extent of hedging their portfolio risk, and also they need to disclose in their offer document if they want to trade in the derivatives market. Moreover, it must conform to the scheme’s overall objectives.”

“Derivatives are used for hedging which by its nature is a passive investment strategy. But mutual funds like to actively churn portfolios for higher returns,” said one fund manager who did not wish to be quoted.

But that could be changing said another. “There are a couple of mutual funds which do provide scope and exposure for derivatives trade, but it is still at a very dormant stage,” he said.

“There is emerging interest in this segment in the case of mutual funds and it is a matter of time before mutual funds find it more acceptable to invest here,” an analyst with a brokerage firm added.

This is a highly speculative trading activity and even if one contract fails, which is often the case in these choppy market conditions, it means heavy losses for the investor, says Ms Gandhi.

Retail investors had better take heed.

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