To protect investors from any potential loss due to mutual funds’ exposure to derivatives, the Securities and Exchange Board of India (Sebi) has set limits on fund houses’ exposure to equity, debt and derivatives to 100 per cent of net assets of the scheme.

Earlier they could go beyond 100 per cent. The market regulator has also barred mutual funds from writing options or purchasing instruments with embedded written options.

Fund managers said the guidelines will not have any major impact. The norms are precautionary in nature.

“These are refined guidelines of the old norms for derivatives that were in vogue. In this set of guidelines, Sebi has clearly defined what mutual fund houses can do and what they cannot. I don’t think there will be any impact as no one was exceeding the prescribed limit. However, Sebi has put in some restrictions about writing calls and options. There may be some impact due to that,” the chief investment officer with a mutual fund house, who did not want to be named, said.

“These norms are only to safeguard interest of investors. There is nothing dramatic in these guidelines,” CEO of another mutual fund company said.

The norms will be applicable to new schemes. For all existing schemes, compliance will be effective from October 1. Sebi said the total exposure in option trade must not exceed 20 per cent of the net assets of the scheme. Cash or cash equivalents with residual maturity of less than 91 days may be treated as not creating any exposure.

Sebi also said mutual funds may enter into plain vanilla interest rate swaps for hedging purposes. The counter party in such transactions has to be an entity recognised as a market maker by the RBI.

Further, the value of the notional principal in such cases must not exceed the value of respective existing assets being hedged by the scheme. Exposure to a single counter-party in such transactions should not exceed 10 per cent of the net assets.

Sebi has instructed all fund houses to disclose their exposure in derivates in a uniform format in half-yearly portfolio disclosure reports. Swaps should be disclosed separately as two notional positions in the underlying security with relevant maturities, Sebi said.