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Funds Get New Option

NSE’s launch of interest rate futures has the post-crisis MF industry beaming

The mutual fund industry may just have got hold of a new instrument that it can use for investing. We are talking about the launch of interest rate futures (IRF) on August 31 by the National Stock Exchange.

IRF consists of a contract to buy or sell a debt instrument, where the price has been decided in advance for a delivery at some future date. It involves the 10-year government bond that has a 7 per cent notional interest rate that is to be paid every 6 months. The lot size is Rs 2 lakh. These deals are to be carried out on a stock exchange which will guarantee delivery.

Since the price is locked-in, the transaction cancels out the interest rate risk.

While reducing risk is a great lure, mutual funds are also eyeing the benefits that may flow from the possibility of greater availability of liquidity in the instrument. Liquidity has increasingly become the focus for asset management companies (AMCs) in the wake of the October, 2008 crisis when many fund houses came to the brink of closing down when there was a run by investors to withdraw funds in the wake of the global financial crisis hitting Indian shores in all its fury.

The positives are enough to get the MF industry to actively pursue the launch of new schemes. Those who are not contemplating launch of new schemes are exploring the possibility of broadening the mandate of the existing schemes to encompass IRF, reports Business Standard.

Most fund houses have tagged IRF as an excellent instrument as it may serve to enhance the existing portfolio and returns, apart from mitigating risks.

However, the jury is still out on how the instrument fares as IRF was earlier launched in 2003, but it was not found satisfactory.

Interest rate futures registered trading volumes of Rs 276 crore on August 31, the first day of trade.