The following discussion is just food for thought, based on recent measures from the stock market regulator SEBI to curb speculative activity in the futures and options (F&O) segment. One of these was to increase the instruments’ contract value from ₹5 lakh to ₹15-20 lakh, making it tougher for retail traders to participate in the F&O segment. Perhaps, a simple trading product can offer a solution for SEBI’s concern about retail participation while allowing traders to get F&O exposure.

Managed funds

SEBI can permit brokerages to apply for a separate licence to start a trading fund. The minimum investment in the fund can be ₹2 lakh in line with the optimal capital needed to previously trade in the F&O segment. Brokerage firms can pool retail money into the fund that can take exposure to F&O.

There are a couple of advantages with this structure. One, it addresses SEBI’s concern that retail traders lose money in the F&O segment because they do not appreciate the risks associated with these instruments. In the proposed set-up, professional traders will manage the money. And two, the capital required to take exposure in the fund will be affordable for individuals who were earlier trading in the F&O segment.

It is important that the brokerage firms have an incentive to offer such funds. Why? Unlike typical equity mutual funds that do not trade frequently, funds in the F&O segment must trade actively. That requires time and effort. Therefore, the funds should be allowed to charge a high flat fee of, say, 2% on the investment value. A performance fee, as paid to hedge funds and private equity funds, would be desirable but difficult to implement. Why? As with mutual funds, the funds ought to disclose the daily net asset value. Redemption must be allowed on any business day without lock-in period, as the funds will invest in short-dated tradable instruments. Such short-dated fund structures make it difficult to compute and manage performance fees.

Conclusion

This idea is aimed at spurring a discussion among players to explore avenues for retail traders to access the F&O segment, respecting SEBI’s concern about speculative trading. The idea necessitates regulatory steps from SEBI to allow such funds to be introduced. Note that, unlike mutual funds, pooled funds can be absolute-return products, with no performance benchmarks.

(The author offers training programmes for individuals to manage their personal investments)