Consider a client who has historically invested only in equity mutual funds but is now intrigued by hedging their portfolio using exchange-traded futures. While the shift from a passive systematic investment plan to active derivative management seems straightforward, the Mark-to-Market (MTM) settlement mechanism often catches retail investors off guard. Unlike mutual fund units where the price fluctuations are reflected in the daily Net Asset Value (NAV) without requiring additional capital, futures contracts require daily cash settlement of gains and losses.
This daily cash flow creates a liquidity pressure that is absent in long-only mutual fund schemes.
In practice, this means your client must maintain a consistent surplus in their trading account to cover potential daily losses. If a client invests in an SIF strategy that employs hedging, they might assume the ₹10 lakh threshold they deposited covers all requirements, but they must be prepared for potential margin calls if the market moves against their position.
As a distributor, your duty is to explain that MTM is not merely a theoretical accounting entry but a real-time transfer of cash. Failing to emphasize this leads to scenarios where a client is forced to liquidate a core mutual fund holding to meet a margin call, effectively turning a temporary hedging strategy into a realized capital loss.
When conducting suitability assessments, you must distinguish between the ‘paper’ volatility of an equity fund and the ’liquidity’ volatility of a futures position. While a retail investor can hold a volatile equity fund through a market dip, they cannot hold a ’loss-making’ futures position indefinitely without providing more cash. This fundamental difference in cash flow management must be documented during your risk profiling process. Ensuring the client has a dedicated liquid buffer—separate from their long-term corpus—is a non-negotiable step for any professional advisor in the Indian market.
Always remember that in the world of derivative hedging, cash is the primary variable that determines the survival of the strategy. If you do not prepare your client for the discipline of daily MTM settlement, you are essentially exposing them to forced liquidation risks that undermine the very purpose of their investment strategy.
Nuance
Check Your Understanding
An investor holds a short position in Nifty futures worth ₹15 lakh. At the end of the day, the settlement price drops, resulting in a profit. What happens to this gain during the MTM process?
Why must a distributor warn a client about the cash flow requirements of an exchange-traded futures hedge compared to a traditional equity fund investment?
This is a companion read for Section 15.2 — Futures contracts from Pass Certification Examination for Mutual Fund - Specialized Investment Fund Distributors by Akhilesh Gururani, available on Amazon Kindle.
Copyright © 2026 Akhilesh Gururani. All rights reserved.