Sebi clarifies MFs trading in derivatives

SEBI has allowed mutual funds to trade in derivative products to offset the potential losses from the cash market positions. The MFs may also deal in derivatives for rebalancing when a particular portfolio position could be achieved more efficiently or at lower cost rather than trading in the cash market, Sebi said in a communications.

Sebi’s advisory committee on derivatives has clarified that certain transactions could be done for hedging and portfolio balancing purpose. The market regulator had concerns over the effectiveness of the hedge and their deal size to cover for risks, it said. An income fund with a large portfolio of corporate bonds may incur losses when credit spreads of instruments degrade or when defaults take place, it said adding the fund could buy credit derivatives for hedging when such events happen.

Similarly, for equity MF with an exposure to the market index may sell index futures or buy index put options, to reduce the losses that would take place if the index drops. On rebalancing of portfolio, Sebi said the mutual fund has a fiduciary obligation to its unit holders to buy assets at the best possible price. ‘‘If it is cheaper, (after adjusting carrying cost) to buy a stock future rather than the stock itself, the fund does have a fiduciary obligation to use stock futures unless there are other tangible or intangible disadvantages to using derivatives’’, it added.