Mutual Funds

MFs derivative exposure drops to one-year low

PTI New Delhi | Updated on September 23, 2012

Equity mutual funds’ investment in derivative products has dipped to a meagre 0.92 per cent, the lowest since August 2011, amid regulatory pressure on them against making profits through futures and options segments.

As per the latest data available with the market regulator Sebi (Securities and Exchange Board of India), various equity mutual funds had deployed a total of Rs 1,719 crore in derivatives at the end of August 2012.

This accounted for just 0.92 per cent of the equity funds’ total assets of Rs 1.87 lakh crore.

This is the lowest derivative exposure of stock funds since August 2011, when they had deployed Rs 1,657 crore, or 0.88 per cent of Rs 1.88 lakh crore worth assets managed by equity MFs at that time.

These funds use equity derivatives to hedge the risk associated with positions in cash equity market. Some schemes like arbitrage funds also aim to generate income through opportunities arising out of pricing differential of a stock in cash and derivative segments.

Besides index futures, many individual stock futures and options are also available in derivative segment.

Unlike direct stock investments in the cash market, where gains or losses are realised on the basis by the prevailing market price, F&O products allows the investors to take positions based on future price and upward or downward movement of an index or individual stocks.

The derivatives exposure of equity mutual funds was as high as 3.5 per cent in July 2010. However, Sebi in August 2010 directed mutual funds to disclose investments in equity derivatives and restricted them from selling an equity product that involves betting on F&O segments.

So far in 2012, the month-end exposure of equity MFs to derivatives has stayed between Rs 1,700 crore and Rs 2,500 crore.

While actively managed equity mutual funds schemes often manage risks by use of derivatives for portfolio re-balancing during short periods of time, derivative products can provide disproportionate gains or result in disproportionate losses to the investor, said market experts.

The risks associated with the use of derivatives are different from or possibly greater than, the risks associated with investing directly in securities and other traditional investments, they added.

Published on September 23, 2012

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