Fund houses increase exposure to derivatives

Mutual funds (MFs) have bought a large chunk of derivatives to hedge against the rising uncertainty in equity markets. Sebi data shows MFs bought ~228 billion of equity derivatives in August.

At 2.2 per cent of MFs’ equity assets, the share of equity derivatives was the highest in more than threeand-a-half years. The last 12month average stood at 1.35 per cent.

“The rise in derivatives exposure is on account of the sharp spike in market volatility. Uncertainty in the markets has gone up due to the ongoing currency risks and trade wars. So, fund managers are hedging against these risks,” said Rajesh Iyer, chief executive officer of DHFL Pramerica MF.

Experts say the trend will only continue as markets

enter an uncertain phase ahead of elections.

Recently, the markets have seen sharp swings as the default by IL&FS has cast doubts on credit quality of other financial firms. This has resulted in liquidity drying up even for debt papers with

high credit ratings, raising concerns on these companies’ ability to raise debt at comfortable borrowing costs.

Weak economic conditions have also hurt the sentiment. The fall in rupee and rise in price of crude oil has stoked concerns of inflationary

pressures. The rupee has slipped over 10 per cent in FY19, while crude prices has surged 18 per cent in the same period.

The Sensex has corrected about 6 per cent this month — its worst monthly showing since February 2016.

The financial space, usually a preferred choice for investments by fund managers, has been among the worst hit. The BSE Finance has corrected 13 per cent, with the likes of housing financing companies such as Indiabulls Housing, Can Fin Homes and Dewan Housing Finance losing 25-56 per cent in September. MFs are not only increasingly hedging their risks, but also slowing down their investments in the stock markets.

MF’s flow of investments in this fiscal year has slowed down to a monthly average of ~122 billion, which is 23 per cent lower than the last nine-months’ average of ~159 billion.

To arrest the fall in rupee and deal with the liquidity squeeze, the Centre on Wednesday raised import taxes on $12 billion of goods to narrow the current account deficit.