Mutual Funds
SEBI seeks to regulate fund investment in & disclosure of derivatives

SEBI has sought clarity and limits on MF exposure to derivatives and has outlined a uniform detailed format for computing derivatives in their half-yearly portfolios

Market watchdog Securities and Exchange Board of India (SEBI) has sought views from mutual funds on the proposed circular which tweaks certain clauses of its earlier orders in order to bring more transparency and clarity in disclosure of MFs’ investment in derivatives in their portfolio statements. The draft circular was sent to all the chief general managers and investment managers of fund houses on 25 March 2010. Moneylife possesses a copy of the draft circular sent to all asset management companies (AMCs). If approved by fund houses, the earlier format prescribed by SEBI in its circular dated 24 November 2000 will be discussed, and modified to include the new format.

The latest circular limits the gross cumulative exposure of MFs through debt, equity and derivatives positions to 100% and option premium paid to 20% of the net assets of the scheme. It cannot exceed the prescribed limits.

Exposure in derivatives due to hedging may not be included in the above prescribed limit, only if such exposure reduces losses. Cash or cash equivalents with residual maturity of less than 91 days will not be included in this limit. Further hedging cannot be done for existing derivatives positions; if done, then it will be included in the above mentioned limit. The derivatives instrument used to hedge has to have the same underlying security as the existing position being hedged. The quantity of underlying security associated with the derivatives position taken for hedging purposes should not exceed the quantity of the existing position against which hedge has been taken. Exposure due to derivative positions taken for hedging in excess of the underlying position against which the hedging position has been taken will also be included in the 100% gross exposure limit.

MFs can enter into plain vanilla interest rate swaps for hedging and the value of the notional principal must not exceed the value of respective existing assets being hedged by the scheme.

The circular also outlines certain modifications pertaining to derivatives position computing. Currently the manner of half-yearly portfolio derivatives disclosure is not uniform across the industry as the SEBI (MF) Regulations, 1996, do not specifically prescribe a format for such disclosures.

SEBI has also asked MFs to separately disclose the hedging positions through swaps as two notional positions in the underlying security with relevant maturities.

“For example, an interest rate swap under which a mutual fund is receiving floating rate interest and paying fixed rate will be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap,” states the draft circular. MFs will also not write options or purchase instruments with embedded written options. Further, while listing net assets, the margin amounts paid should be reported separately under cash or bank balances.

Following the recommendations of the Secondary Market Advisory Committee, SEBI’s circular dated 14 September 2005 permitted MFs to participate in the derivatives market at par with foreign institutional investors (FIIs) in respect to position limits in index futures, index options, stock options and stock futures contracts. The SEBI circular dated 19 September 2002 included disclosures related to equity and debt schemes. 


FM gives debt relief to coffee growers, tax relief to others

Sops might cost the government Rs400 crore in revenues; no rollback declared on fuel prices

The government announced a slew of concessions worth up to Rs400 crore for coffee growers, local tobacco industry, hospitals, cancer drugs and urban housing for the poor, among others, as part of the Finance Bill that was passed today, reports PTI.

Replying to a debate on the Finance Bill, 2010-11, finance minister Pranab Mukherjee said he had decided to lower excise duty on hand-made cheroots priced up to Rs3 per stick to 10% following demands from members and the industry.

He also announced a Rs-241 crore relief package for coffee growers by way of waiving three-fourth of loans taken prior to 2002, especially by small farmers, while restructuring repayments for the rest.

Mr Mukherjee, however, did not roll back the hike in excise and customs duty on petrol and diesel, saying that the government has to look at ways of meeting the Rs85,000 crore revenue loss on fuel sale expected this fiscal.

The measures announced will have a revenue implication of Rs300-Rs400 crore, revenue secretary Sunil Mitra said.

The opposition NDA and the Left parties staged a walkout in protest against the government’s decision not to roll back the Rs2.71 a litre increase in petrol and Rs2.55 per litre hike in diesel rates.

With a view to giving impetus to healthcare, the minister announced tax breaks for construction of hospitals with at least 100 beds anywhere in the country.

On construction of real-estate complexes, which has been brought into the ambit of service tax in this year's Budget, Mukherjee increased the tax concession by offering more abatement.

Abatement (tax rebate) has been increased to 75% from 67% of the gross value of property that includes land value.


Fund gimmick: A fund that ‘swings’ between mid-caps and large-caps

The scheme claims to combine benefits of both large-caps and mid-caps by swinging the portfolio in the direction of the more attractive option. If that’s not market-timing, what is?

When it comes to fancy ideas and pushy sales promotions, Indian mutual fund houses would definitely occupy pole position. Here is one such offering from HDFC Mutual Fund that is as strange as they come. Existing investors of HDFC MF are being enticed into a half-baked offering named HDFC Premier Multi-Cap Fund (PMC). It is an open-ended growth scheme, which aims to generate capital appreciation in the long term through equity investments by investing in a diversified portfolio of mid-caps and large-cap ‘blue chip’ companies.

It claims to have a ‘unique’ investing strategy, wherein it will invest a minimum of 35% of the scheme each in large caps and in mid caps. The balance of the scheme will be a ‘swing portfolio’ that can invest in either of the two. How will this operate? Depending on the fund manager’s perception as to which appears more attractive, the ‘swing’ part of the portfolio will be directed towards either large-caps or mid-caps.

The rationale behind this strategy is that mid-caps and large-caps do not always follow a uniform trend. Sometimes large-caps perform better while at other times mid-caps gain the edge. So, investments under these two categories would yield varying results at different times.

So, the fund house suggests that in order to maximise benefit from the movements of each category, one should dynamically manage their portfolio by switching into different categories of the market. For individual investors to do this on their own is not practical as it involves a lot of research, costs and taxes.

That’s where the HDFC Premier Multi-Cap Fund claims to offer a unique edge to investors. Instead of focussing on the movements of the broader indices—the Sensex and the Nifty—the Fund allows investors to play the movements of large-cap stocks and mid-cap stocks. There are several problems with this.

First, this scheme appears a lot similar to HDFC Equity Fund which invests primarily in large-caps but also provides exposure to mid-caps. It seems like an adapted version of HDFC MF’s most popular fund scheme.

Second, how is swinging from one kind of stock to another anything other than market-timing —that the fund companies always frown upon?

Third, more importantly, though, this concept of having flexibility between allocation towards different sub-components is not a new practice. Fund managers are free to realign portfolio allocations as per their whims and fancies.

That is why fund prospectuses are full of vague generalisations. As such, this approach of HDFC PMC Fund is not a ‘unique strategy’ after all. But then fund management is a business, which entirely depends on assets fund companies can gather by such apparently differentiated sales pitches.



balaji v

6 years ago

what is the benchmark that this fund tracks or is measured against?

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