With mutual funds in India reaching their highest-ever investment in the futures market, the rise in derivatives exposure underscores both opportunities and significant risks.
MUMBAI (Economy India): In July 2024, mutual funds in India saw their investment in the futures market soar to an unprecedented Rs 1.9 lakh crore, marking the highest level since July 2018. This sharp increase highlights the growing interest in the highly risky segment of the stock market. While the overall growth in assets under management (AUM) has fueled this trend, the associated risks cannot be ignored.
AUM Growth and Derivatives Exposure
Over the past six years, mutual funds have seen a dramatic increase in their AUM, rising from Rs 23 lakh crore in July 2018 to Rs 64 lakh crore by July 2024. During this period, the share of derivatives in mutual fund portfolios has more than doubled, from 1.2% in March 2020 to 3% in July 2024.
This increase in derivatives exposure is particularly significant, as mutual funds are permitted to invest in the futures market solely for hedging purposes—to protect against unexpected losses. “The rise in derivatives within mutual fund portfolios indicates a shift towards more complex investment strategies,” notes a market analyst.
SEBI’s Findings on Derivatives Activity
According to the Securities and Exchange Board of India (SEBI), mutual funds’ share in the equity derivatives segment on the National Stock Exchange (NSE) accounted for 5% of the premium turnover in the financial year 2023-24. This represents a significant increase from just 0.4% in 2018-19.
During this same period, foreign investment in equity derivatives rose from 13.6% to 17%, while proprietary investment increased from 37.8% to 40%. The rapid growth in mutual funds’ involvement in derivatives is a clear indicator of the industry’s evolving strategies.
Focus on Index and Stock Futures
The majority of mutual fund investments in the futures market are concentrated in index and stock futures, which are considered relatively stable compared to other derivatives. However, mutual funds also hold significant positions in other derivatives, including equity options and interest rate swaps.
Hybrid funds, particularly arbitrage schemes, are major players in these investments. Arbitrage funds typically buy in one market segment and sell in another, profiting from the price differences between the cash and derivatives markets. These funds alone account for around Rs 1 lakh crore in derivative investments, while equity and debt funds hold far smaller positions, with Rs 10,000 crore and Rs 7,500 crore, respectively.
The Risks of Futures Trading
Futures and options (F&O) trading is inherently risky, as it involves betting on the future movement of the stock market. Investors can take long or short positions, speculating on whether the market will rise or fall. However, if the market moves against their position, the potential for loss is substantial.
“Futures trading is not for the faint-hearted,” says a financial advisor. “While it can offer high returns, the risks are equally high. Investors must be cautious and fully understand the potential downsides before venturing into this segment.”
The surge in mutual funds’ investments in the futures market reflects both the growth and the increasing complexity of the industry. While these investments offer opportunities for higher returns, they also come with significant risks. Investors must weigh these risks carefully and consider their own risk tolerance before participating in futures trading.
Economy India
