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Futures & Options

Mini Contracts and No Mutual Fund Entry Load

Mini Contracts
NSE has introduced “mini-contracts” on the NIFTY. These are exactly the same as the futures contracts on the Nifty, but have a lot size of 20 instead of 50. The new symbol is MINIFTY.

The idea is to give investors a smaller contract size (approx. 1 lakh) to work with instead of the 3 lakh plus contract when you buy the NIFTY. Lot lesser margin – typically Rs. 10,000 or so – and provides good hedging opportunities for sub-10-lakh investors. Also, there may be opportunities when you have two derivatives contracts on the same underlying. While the futures themselves will be closely traded and not provide too much room for arbitrage, the options contracts may provide some insight. Let’s see how it pans out.

No more entry load
Mutual Fund investors can rejoice. SEBI has removed the entry load for all investments made directly to the fund house. Meaning, applications made directly by way of the Internet, Direct application to the AMC where no broker is involved.

This saves you 2.25% (usual entry load) and reduces net fund expenses (since no trailing loads need to be paid). If you invest Rs. 5 lakhs in mutual funds, this is a saving of over Rs. 10,000! Even for a one lakh tax saving investment, you end up saving around Rs. 2,250.

This is applicable from January 4. How it will work is something I have to research myself, and I’ll do that after Jan 4. But note that you will never need to buy Mutual Funds directly from a broker. If you’re doing your own research, don’t pay someone else.

(Read Value Research for good comparisons and articles on funds)

Note: Buying funds from your online demat account like ICICI Direct, Sharekhan or Reliance Money does not excuse you from the entry load. You must buy from the mutual fund’s website or directly give your application to the mutual fund, striking away the column were “distributor code” is written. Otherwise you will pay the entry load.

Also note that ICICI mutual fund is different from ICICI Bank which in turn is different from ICICI Direct. If you give your application in the bank’s branch, you will still be charged an entry load. You should confirm with the Asset Management Company (AMC) before you submit an application, about how you can completely avoid the entry load.

  • Ady says:

    >Mini contracts are for small investors indeed but I think futures are more of a speculating instrument than a hedging instrument in India. They should not encourage speculation among retailers as they are the ones who get burnt by over leveraging themselves. I hardly see retail people hedgeing themselves by a futures contract. What do you think?

  • Deepak Shenoy says:

    >I’m not sure if speculation should not be encouraged – speculation is perfectly fine, as it is a very large business. You only hear of the folks that get burnt, but there are many many more that make a lot of money speculating. We should actually encourage speculation under a regulatory framework.

    I don’t think futures are only for hedging either. Futures can simply be a leveraged longer term instrument or even better, one side of a covered strategy (like a calendar spread or a covered call) It also encourages shorting (which is essential in a mature market).

    Mini contracts are also good for those that can’t afford to lose big, but need small amounts of leverage that is not intraday. Mini contracts give you 10x leverage for about 10,000 Rs., something that’s good for the small investor so they don’t blow up big either. (max loss possible is say 50% – just 50K, which is not as bad as the huge losses they can take in the full future)

  • சாமான்யன் Siva( says:

    >Thanks a lot detailed info on MF entry

  • shanvas says:

    >The article on the waiver of the load for direct applications of mutual funds through the AMC is very informative. What action should one take the AMC refuce to comply. I did talk to a AMC, they said that they are not aware of such notifications.