A client calls you, deeply concerned about a sudden ‘adjustment’ in their portfolio statement regarding an arbitrage strategy. They see a debit in their account despite the market having moved in their favor earlier in the day. As a distributor, you must explain that this is not an error but the Mark-to-Market (MTM) settlement mechanism, a fundamental feature of futures contracts that distinguishes them from the buy-and-hold nature of traditional equity mutual funds.
Unlike a mutual fund where you wait until redemption to realize gains or losses, futures are settled on a daily basis to ensure the integrity of the clearinghouse.
In the Indian derivatives market, MTM settlement requires that any gain or loss is adjusted at the end of every trading session. If the futures price closes higher than the previous day’s settlement price, the buyer’s margin account is credited, and the seller’s is debited. This daily cash flow ensures that no counterparty carries significant exposure overnight, effectively eliminating the risk of default that could otherwise threaten the systemic stability of the market.
While mutual fund investors are accustomed to the gradual change of an NAV, the MTM process creates a dynamic and immediate impact on cash liquidity within the client’s margin account.
For a distributor, understanding MTM is critical when managing an investor’s expectations for Specialized Investment Fund (SIF) strategies that utilize hedging. If a client invests their ₹10 lakh minimum threshold into a strategy involving derivatives, they must maintain adequate liquid cash buffers to avoid a ‘margin call.’ A margin call occurs when the MTM loss causes the account balance to fall below the mandatory maintenance margin level set by the exchange.
If the client is caught off guard, they might be forced to liquidate other liquid mutual fund holdings at an inopportune time to cover the shortfall, potentially derailing their long-term investment plan.
By proactively educating your clients about MTM, you shift the conversation from speculative fear to disciplined risk management. Always clarify that while an equity mutual fund is a long-term investment vehicle, a derivative-based strategy is an active instrument requiring oversight. Providing this clarity ensures that the client views the margin account not as a bank account, but as a dynamic pool of capital that demands active monitoring.
Proper disclosure during onboarding, especially for HNI clients who may be new to derivative-heavy SIF strategies, protects you from claims of mis-selling and ensures the client remains comfortable even during periods of market stress.
Nuance
Check Your Understanding
An investor holds a long position in a Nifty futures contract. On Monday, the market closes at a level that results in an MTM gain of ₹5,000. On Tuesday, the market falls, resulting in an MTM loss of ₹8,000. What is the impact on the investor’s margin account by the end of Tuesday?
Which of the following best describes the primary purpose of Mark-to-Market settlement in the Indian derivative market?
This is a companion read for Section 15.6 — Payoff Charts for Futures contracts from Pass Certification Examination for Mutual Fund - Specialized Investment Fund Distributors by Akhilesh Gururani, available on Amazon Kindle.
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