There is always a time lag between incoming fund flow and deployment of the same in the stocks.If fund experienced the large amount of the inflow,then scheme able to take immediate exposure in equities via index futures.Later when money is deployed gradually,they reduce the value of index futures.Also the strategy of increasing equity exposure via index futures is used for idle lying cash.Of course,there are certain regulations from regulators about positions in derivative markets.Common strategies are as follows
1.Mutual funds can buy index futures against idle cash / expected incoming cash to get protected against rising market.Maximum limit is upto 20% of the portfolio and upto cash equivalents of the portfolio.
2.Mutual Funds can buy index call options instead of index futures discussed above.
3.Mutual Funds can buy particular stock future against the cash and equivalents max upto 20% of the portfolio and upto extent of cash available.
4.Funds can buy stock call option instead of buying the stock future.
5.Sometimes a great news based volatility is created in a particular stock.Under such conditions mutual funds can sell the stock future against the existing stock,,upto extent of stock holding in portfolio.
6.Mutual funds can also buy stock put options instead of selling the stock future.Mutual funds are not allowed to sell the options.Means rather buying put options they can not sell call options.
7.As per regulation,the mutual fund position limit in all index futures / Options contracts on a particular underlying index is Rs.500 crore or 15% of the total open interest ,whichever is higher in a particular stock exchange.
Though fund managers can hedge their positions in future and option market,their is always a risk of mis-judgement.Any wrong decision can lead to capital erosion or lower market rising benefits and so effectiveness of such positions depends upon the accurate market tracking by a particular fund house….isn’t it?
