SEBI has relaxed the trading restrictions in derivatives markets for mutual funds. Until now, mutual funds could take only Rs. 150 crore exposure per future and options (F&O) scrip in the derivatives market which has now gone up to Rs. 300 crore per scrip now.
The SEBI move is expected to benefit arbitrage funds with a large corpus as this Rs. 150 crore limit was too restrictive. “It is a good move. With the Rs. 150 crore restriction going away, the biggest beneficiaries of this will be the arbitrage funds which have a large AUM,” says Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund.
When asked if more money chasing F&O stocks could negatively impact the returns in this category, Lakshmi says, “The yardstick to compare arbitrage funds is short term rates which have been coming down lately. Getting arbitrage opportunities is purely a function of market view. So fund managers can find opportunities in volatile as well as bullish market. As long as markets have these two sentiments, I don’t think it should be a challenge because the returns are relative,” adds Lakshmi.
Suresh Soni, CEO, DHFL Pramerica MF says that fund houses can now allocate the money more efficiently. “According to SEBI norms, no security can be more than 10% of portfolio. The other restriction of the market wide position limit was limiting the value of holding in one company to Rs. 150 crore. With the increase in this limit, now we can allocate more money to the highest yielding F&O stocks,” says Suresh.
In arbitrage funds, one can estimate the expected returns every month on the basis of spreads. Large investors like corporates and HNIs use this strategy to park money in arbitrage funds for short term. Arbitrage funds have delivered 7% return over a one-year period, shows Value Research data. Going ahead, Suresh expects that arbitrage funds would continue to do well.
Currently, the arbitrage category has assets under management of over Rs. 30,000 crore.
SEBI allows fund houses to invest in derivatives only for the purpose of hedging. They are not permitted to take naked positions to leverage.
