MFs now take derivatives option to gain from swings

MUMBAI: The quest to minimise losses ��� or even make profits ��� in the turbulent market conditions is compelling equity fund managers to look beyond conventional investment methods. As a part of such an attempt, they are increasingly trading in equity derivatives to benefit from short-term movements in stocks or indices.

���Nowadays, mutual funds are increasingly looking at derivatives trading strategies with a specific view on stocks or the market,��� said Yogesh Bhatt, fund manager at ICICI Prudential Mutual Fund, which is a dominant player in equity options among local fund houses.

This is in stark contrast to their earlier investment strategy, wherein money managers bought and held stocks for a longer period before booking a profit. However, with sharp gyrations in a short range making it difficult for managers to stick to the buy-and-hold strategy, they are trying out trading strategies in futures and options (F&O) that reflect their short-term views on a stock or the Nifty. However, there are no indications yet whether trading in derivatives has helped them minimise losses, or make a profit, in recent months.

Industry officials said most fund managers have increased their participation in equity derivatives, albeit in varying degrees, proportionate to their expertise and asset size. The quantum of F&O positions was sizeable in majority of equity schemes of ICICI Prudential Mutual Fund as on February 28. DSP BlackRock also has a significant chunk of F&O positions in several of its equity schemes.



Industry officials said some other large mutual funds, which are among the top ten in terms of assets under management, are also using F&O other than for hedging of their portfolios. ���Smaller mutual funds do not have the wherewithal to have a significant exposure to derivatives. If things go wrong, it will be too much for them to handle,��� a top official at a mutual fund house said.

Officials at brokerages said the exposure of some mutual funds to F&O at times is significant enough to be counter-parties to foreign investment banks, which have spearheaded the evolution of derivatives in the country. MFs, however, are unable to replicate the trading strategies of these savvy investors.

For instance, foreign investment banks usually initiate strategies in index options to bet on the direction of the volatility ��� popularly referred to as vol trades ��� rather than the market.