Calcutta, Nov. 16: The Securities and Exchange Board of India (Sebi) today allowed mutual funds to short-sell as well as lend and borrow securities. The regulator has also put a cap on expenses that index funds and exchange traded funds can charge.

“This provision will give fund managers the leeway to manoeuvre their investments as they will now be able to sell a stock without actually holding it and then buy it when the share price comes down. This will bring in more liquidity,” said Anup Bhaskar, head (equities) of UTI Mutual Fund.

“Fund managers invest in stocks based on their fundamentals. However, if they anticipate a fall in stock prices, they may go short on a stock or stocks,” he added. According to Bhaskar, Sebi’s move could be seen as a prelude to allowing foreign institutional investors and hedge funds to sell short.

“Theoretically, short-selling, if practised frequently by fund managers, will make a scheme riskier than before. They can short-sell a stock by paying a margin to the bourse. If the price doesn’t fall, the entire margin will go,” said Dhirendra Kumar, chief of Value Research Online.

“Lending and borrowing in securities would create more volumes and also better use of idle stocks. Short-selling will allow us to launch a lot of innovative products,” said Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund.

“Sebi’s move will not only create more liquidity for us but will also be beneficial for all equity-diversified and arbitrage funds. Earlier, we used to trade securities by positioning prices in futures and stock markets and stay invested in cash, but now we will be able to lend and buy on a shorter call,” said Srinivas Jain, chief marketing officer of SBI Mutual Fund.

The new regulations also put a cap on the expenses of index fund schemes. An index fund now cannot charge more than 1.5 per cent of its weekly average net assets as expenses. In index funds investments in stocks are made in the same proportion they constitute the benchmark index that the scheme follows. Further, no such fund can charge more than 0.75 per cent of its weekly average net asset as investment and advisory fees.

“This is an old proposal and most index funds are well within this limit,” said Sanjay Sinha, CEO of SBI Mutual.

“Barring two schemes of LIC Mutual Fund, the expense ratio of all other index and exchange traded funds are below the 1.5 per cent limit. Sebi should bring down the expense ratio for index funds to 0.75 per cent,” Kumar said.