Derivative mutual funds

The SEBI has lifted the ban on mutual funds using derivatives in their
portfolio. Until now, the fund houses could use futures and options
only for the purposes for hedging. It was probably set up keeping the
larger interests in mind, wherein mutual funds are taken largely by
retail investors, who do not have a high risk appetite.

The stakes involved and the volatility of the FO segment did not allow
retail investors their share of the pie. It was largely reserved for
the larger investors, with huge market caps. To buy a nifty index
future lot, one would have to buy 200 nifties, and at the present
value of over 2500, it comes out to be over Rs 5 lakh. Even if a 5%
margin is applied, the amount to be invested is Rs 25,000. Indian
investors do not remain a part of the retail segment, when their
investments cross Rs 50,000. Furthermore, options are coupled with
huge premiums, which are beyond the affordability of the most.

In such a situation, the permission of mutual fund houses to start
funds trading in derivatives has given rise to another round of
speculation. Experts feel that this will increase the liquidity of the
market by some Rs 60,000 crore. The BSE Sensex rose from 8189 to 8283
or 1.148% yesterday, 15th of September. We can expect a lot of
interesting things happening in the next few days.