Pass Certification Examination for Mutual Fund - Specialized Investment Fund Distributors Difficulty: Beginner 2 Questions   5 min read
📌 Chapter 15.4 — Some important terminology associated with futures contracts

A common situation for a mutual fund distributor is dealing with a client who transitions from the relatively static environment of mutual funds to the dynamic world of futures. Picture an HNI client who, after hitting the ₹10 lakh threshold required for an SIF investment strategy, decides to hedge their equity exposure using index futures.

Unlike a mutual fund where the NAV is updated once daily and the units remain constant, the client is often confused by the daily settlement process. They see a fluctuating balance in their ledger and ask why their initial margin is being adjusted even when they have not closed their position.

Calculating the cumulative Mark to Market (MTM) is vital here because it reflects the true running profit or loss on the derivative position since the date of initiation. The daily MTM is the difference between the current day’s settlement price and the previous day’s settlement price, or the entry price if it is the first day. The cumulative MTM is simply the sum of these daily settlements from the day the contract was opened until the present.

For an advisor, this metric is the primary tool to explain why a client might be receiving a margin call despite the overall trend of the market being positive in the long run.

When you assess client suitability, you must ensure they understand that MTM is a cash-flow reality, not just a paper calculation. If a client’s cumulative MTM turns negative, their broker will demand additional margin to maintain the original position. Failing to explain this can lead to forced liquidation of positions during a minor dip, which defeats the purpose of the hedge they intended to construct.

In your advisory role, you are not just recommending an SIF strategy or a hedge; you are managing the client’s liquidity expectations so that they do not face unnecessary financial distress during volatile sessions.

Always remember that in derivatives, the price is not the value of an asset you own, but the value of a contract you are committed to. By tracking the cumulative MTM, you can provide the client with a clear view of their net position performance. This clarity prevents the panic that often sets in when a retail investor sees a debit entry in their trading account without realizing it is merely a daily adjustment of their cumulative liability or gain.

Ultimately, transparency regarding these mechanical settlements is the difference between a panicked client exit and a well-managed investment strategy.

Nuance

⚠️ Nuance
Candidates often confuse daily MTM with cumulative MTM, assuming that a loss on one day implies the total trade is losing money. In reality, a position can show a negative daily MTM but still hold a positive cumulative MTM if the entry price was significantly lower than the current settlement price. A disciplined advisor tracks the cumulative figure to determine the actual capital impact, whereas the daily figure is merely a mechanism for clearing house risk management.

Check Your Understanding

Practice Question 1

An investor enters a long position in Nifty futures at 22,000. On day 1, it settles at 22,100. On day 2, it settles at 22,050. What is the cumulative MTM at the end of day 2?

Practice Question 2

Why must an advisor explain cumulative MTM to an investor using futures for hedging?

This is a companion read for Section 15.4 — Some important terminology associated with 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.