Market regulator SEBI today asked mutual funds to disclose investments in equity derivatives and

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said the combined exposure in equity, debt and derivatives should not exceed the net asset of a scheme.

Further, the market regulator has also restricted mutual funds from selling an equity product that involves betting on future prices or an equity option.

"The cumulative gross exposure through equity, debt and derivative positions should not exceed 100 per cent of the net assets of the scheme," SEBI said in a circular.

The rules will be effective from October 1 for all new schemes as well as the existing schemes, it added.

In a derivative trade, MFs usually pay the margin amount to buy a scrip of the total value of the stock in the cash market.

SEBI has now said that while calculating the total derivative exposure, MFs should calculate the underlying actual value on investment and not only margin, SMC Capitals Equity Head Jagannadham Thunuguntla said.

The fund houses would now have to disclose the derivative positions in half yearly portfolio disclosure reports. "This would give a better picture of the MFs total exposure in risky assets to the investors," Thunuguntla said.

While SEBI disallowed MFs from writing options, it limited the premium paid for option purchase to 20 per cent of net assets of the scheme.

Equity options is a derivative product where investors bet on future value of stocks or their indices and SEBI is against mutual funds getting into the hedging business, as it could suffer losses.

Industry experts said SEBI now wants the MFs to control the risk exposure and clearly demarcate their risky exposure as the current SEBI (Mutual Funds) Regulation 1996 is not clear about such investments.

Further, SEBI restricted the fund houses from hedging in derivative instrument against another derivative, which means hedging a futures contract for an option.

However, a MF can hedge their position in combination of cash and derivatives, which means they can take a position either in derivative or cash and minimise their risk accordingly.

MFs can also enter into interest rate swaps, where one stream of future interest payments is exchanged for another based on a specified principal amount.

"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 market maker by RBI," SEBI said.