Mutual funds may have to disclose derivatives exposure

Mutual funds may have to provide more disclosures regarding investment in equity derivatives, though they would still be allowed to take exposure to these instruments.

The Securities and Exchange Board of India (Sebi) mutual fund advisory committee, which met on Monday to discuss on various issues, has proposed mutual fund houses be more transparent.

“The disclosure requirements have been made more consistent and uniform for all mutual fund houses. As such they are not aggressive participants but take exposure only for hedging purposes, hence they have not been restricted from investing in these instruments” a source familiar with the development told DNA Money.

There were certain apprehensions regarding MF exposure to equity derivatives and that they may be banned from selling options. The selling of options is a risky affair and can lead to unlimited losses if the bets go wrong.

The committee also discussed changes to regulation with regards to mutual funds keeping their portfolio management services (PMS) activities separate. Some asset management companies (AMCs) also provide PMS, and utilise the same infrastructure facilities.

“There needs to be streamlining of the activities and a separate committee would be set up to look into the same though these are initial stages” said the source.

The other main issue on the committee’s agenda was limiting distribution expenses and providing flexibility to MFs to levy fund management charges. However, the committee could not arrive at a decision.

The structure of mutual fund expenses, which AMCs charge customers, stays put for the moment. “The situation remains status quo on the fund management charges” said the source.

The committee, comprising industry and Sebi representatives, was to discuss various ways to charge MF expenses. Currently, MFs charge about 2.25-2.5% of assets under management of the scheme as fund management charges annually, which typically covers management fees (1.25%) and operational, promotional or distributional expenses.

The regulator had proposed to provide flexibility to AMCs by removing the sub-limits on various categories of expenses if the overall cap on total expense ratio is lowered to 1.5% from current 2.25-2.5%.

Source: http://www.dnaindia.com/money/report_mutual-funds-may-have-to-disclose-derivatives-exposure_1390368