Fund houses gear up to make the most of interest rate futures

A week after the National Stock Exchange (NSE) launched interest rate futures (IRF) on August 31, the domestic mutual fund industry is all set to make the most of this new instrument. The industry is planning to either come up with new schemes, or use IRF in their existing schemes.

In fact, factors like better liquidity, increase in fund managers’ execution power and ability to hedge risks are tempting fund houses to act swiftly and take advantage of the new instrument.

Sanjay Sinha, chief executive officer (CEO) of DBS Cholamandalam, said: “Though we are not launching separate schemes, we can use IRF in the existing ones by making some changes in their offer documents.”

Fund managers are betting big on IRF and are optimistic about its success. Since traditionally futures are more liquid, it would lead to the design of newer products accordingly, they said.

Since it will require some structural and IT compliances, fund houses expect to come up with the product at the earliest possible.

“We are thinking of amending the offer documents to use IRF in the existing schemes which will help us hedge the portfolios,” said RS Srinivas Jain, chief marketing officer of SBI Mutual Fund.

Industry experts said that liquidity was a basic necessity for Asset Management Companies (AMCs). Last year, the mutual fund industry faced liquidity problem due to a surge in redemptions.

A product linked to IRF would make the entire portfolio liquid and provide the fund house liquidity, which is essential for a fund’s structure as money could be pulled out by the investor, they added.

According to Sandeep Dasgupta, CEO of Bharti AXA Investment Managers, IRF is an additional tool which will enhance the existing portfolio and returns, and mitigate risks to some extent. “We look forward to start acting on this front after three-four months. We want to first assess our back-end processes and internal controls,” said Dasgupta.

Agreeing to this, Saurabh Nanavati, CEO of Religare Mutual Fund, said: “IRF is an excellent instrument and we are working on to get into this market. It has good potential and we will come up with new schemes. It will basically help us create new products and hedge risks.”

The stimulus packages from the government has provided enough liquidity in the system. However, fund managers are cautious. “So far this year, we haven’t had any liquidity issue, but we must not take it for granted,” said a fund manager.

Industry observers said that since IRF has been launched recently, fund houses would require to adjust their systems. Many of the fund houses might not have internal approvals to do that, they added.