Asset management companies (AMCs) want to participate more aggressively in the futures and options (F&O), as they believe they are in a better position to counter high-frequency traders (HFT), mostly dominated by foreign institutional investors, said sources close to the development.
In a recent meeting with senior officials of the Securities and Exchange Board of India (SEBI), fund houses made a strong pitch for the same, adding that the main reason behind individual investors losing big money in the F&O market is that they are pitted against institutional HFTs. “Retail investors are in no position to take on big foreign institutions. No wonder, over 90% of them lose money,” said one of the sources.
According to data from SEBI, retail investors have consistently been losing money in the derivatives market, with 93% of them incurring an average loss of Rs 2 lakh. The combined net loss stood at Rs 1.81 trillion during the last three financial years (FY22-FY24).
Currently, fund houses face the restrictions while investing in derivatives market whereas retail investors have a free hand, the source said.
“While SEBI has introduced stiffer guidelines to make things difficult for retail investors, data show that it has not served as a big deterrent,” said the CEO of a leading fund house.
From November onwards, SEBI has introduced new guidelines for the derivatives market. These include raising the minimum contract value for index derivatives to Rs 15 lakh, limiting weekly expiries to one per exchange, and introducing an extreme loss margin (ELM) for short options contracts.
However, as the latest NSE data show, retail investors’ share in premium turnover of index options stood at 35.7% in FY25, marginally up from 35% in FY24.
SEBI is currently working on F&O 2.0 guidelines to further reduce retail investors’ enthusiasm in the derivatives market and also supervise big players who try to manipulate the market. According to industry sources, many HFTs’ turnover and exposure will be multiple times their net worth.
At present, mutual funds are allowed to use F&O contracts to protect their investments from potential losses, especially during market downturns. However, they are not allowed to use derivates market for speculation or generate short-term profits. For example, if a fund manager anticipates a decline in stock prices, he may use index futures to hedge the portfolio. In other words, these instruments can only be used to manage risks, improve portfolio efficiency, and ensure liquidity.
Under the new asset class (specialised investment fund), which is meant for high networth individuals (HNIs) with investments of between Rs 10 lakh and Rs 50 lakh, derivatives exposure will be capped at 25% of the asset under management (AUM) for non-hedging and rebalancing purposes. Industry players said the new cap is a good step to begin with, but will need to be enhanced over a period of time.