I heard that in PMS we can’t do leverage derivative trading. please explain this for better clarity. what about the debit spread and credit spread like limited risk strategies. if I start a pms can I do these type of limited risk option spreads. please explain this too
FNO can be used but without leverage and the same has to be mentioned to client in the agreement when signing up for service. Check this for more info.
Posting from that circular
"The Portfolio Managers are permitted to invest in derivatives, including transactions for the purpose of hedging and portfolio rebalancing, through a recognised stock exchange. For clarification on hedging and portfolio rebalancing, the portfolio managers are requested to refer to Circular No. MFD/CIR/21/ 25467/2002 dated 31.12.2002 issued by Mutual Funds Dept., SEBI. The same is available at SEBI website.
The portfolio managers can invest in derivatives on the terms specified in the Portfolio Management Agreement. The Agreement should contain complete details pertaining to the manner and terms of usage of derivative product including quantum of exposure to derivatives (in absolute terms and as a percentage of investments in other securities in the portfolio), type of derivative instruments, purpose of using derivatives, type of derivative position and the exposure thereof, terms of valuing and liquidating derivative contracts in the event of liquidation of portfolio management scheme, prior permission from investors in the event of any changes in the manner or terms of usage of derivative contracts etc.
The total exposure of the portfolio client in derivatives should not exceed his portfolio funds placed with the portfolio manager and the portfolio manager should basically invest and not borrow on behalf of his clients…
It may be clearly noted that investment in derivatives shall be on terms mutually agreed between the portfolio manager and the client through the portfolio management agreement. In the event of the any violation of the terms of the agreement, the portfolio manager shall be responsible."