The recent SEBI decision of doing away with the requirement of obtaining positive consent from unitholders before participating in the derivatives market and offering all unitholders a choice to exit instead of the earlier rule where only dissenting unitholders were offered a choice was not at all required, according to industry experts.

Inherent contradiction

Though the SEBI circular stated it had received representations that “for obtaining positive consent from majority of unitholders as mandated above is challenging on account of the vast geographical spread of unitholders and hence the request for doing away with such requirements,” some fund house CEOs think otherwise.

“Why would somebody not agree with a scheme investing in derivatives and yet choose to stay invested in that scheme?” asked a fund house CEO requesting anonymity.

“The problem of obtaining positive consent from unitholders arises only for those schemes which have not spelt out their intention to trade in derivatives (and would want to) besides having a large base of retail investors. Schemes with this combination are few in number,” said another MF CEO.

Marketmen observed that the average mutual fund investor usually believes in the expertise of the fund manager and would not exit the scheme even if the scheme decided to trade in derivatives. This was despite the move having the potential to introduce variability in the returns of systematic investment plans (SIP).

Chances of misuse

Sageraj Bariya,Vice-President, Institutional Sales, East India Securities, said, “Only discerning investors will press the exit button, but these are very few in number.”

Those in the trade observed that the move could increase speculation in the name of portfolio rebalancing.

Arun Kejriwal, Founder - KRIS Research, said “While SEBI has helped in the ease of doing business for mutual funds, returns from SIPs could now come under a question mark. Though fund houses have used derivatives for hedging (historically), the new dispensation would allow them to use derivatives as a means of speculation. Returns from speculation could be detrimental to the wealth and health of the SIP investor who usually looks for steady returns, thus eroding investor confidence.”

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