Take an assumed bank heavy fund worth Rs 50,00,000 on Monday 2 Feb 2026. Assume its beta against Nifty is 1.10, so it carries Rs 55,00,000 of Nifty exposure. One March Nifty lot, at the future of 25,297.40, is worth Rs 16,44,331. The exposure is 3.34 lots, which rounds to 3. By Monday 30 Mar Nifty had fallen 11.0% and the three sold lots had earned Rs 5,78,370. The fund, which moved like the bank index, had lost Rs 7,11,685. The hedge worked and still left Rs 1,33,315 open. This lesson is about that gap: a beta that is an estimate, a fund that is not the index and a future that is not the spot. The fund is an assumption and the prices are dated NSE settlements, so this shows a method and is no hedge for any real holding. Nothing here is live.
3By the end you can
- Size a Nifty future hedge for a fund from its value, its beta and the value of one lot.
- Name the three parts of basis risk: fund against index, beta against the truth, future against spot.
- Read what a hedge left open in a fall and in a rise, on dated NSE figures.
The idea, plainly
How do I hedge a mutual fund portfolio?
The mechanics are those of any equity portfolio, in three steps. Find the fund's beta. Multiply the value of the units by it to get the exposure to Nifty. Divide by the value of one lot, and round. Sizing and the two instruments are taught in hedging with futures and hedging with Nifty puts. What is new for a fund is the beta. A factsheet may print one, but against the fund's own benchmark and often on monthly returns, which need not fit a Nifty future, so it is estimated: regress the fund's daily returns from its NAV on Nifty's daily returns over a window, and the slope is the beta. The same regression gives the R squared, the share of the fund's movement that the index explains. A large cap fund can show a high one. A sector or mid cap fund shows a lower one, and the rest of its movement is its own.
Read one more paragraph, 157 words
Three practical points set a fund apart from shares. Units sit in a fund account, so the hedge is a separate position in a trading account with its own margin, and the broker's collateral list says whether units count. A NAV is struck on the day's closing prices, while a future trades all day, so a hedge placed mid session is measured against a close it never saw. And the result on a future is business income, counted in the year the position is closed or expires, while the fund's gain or loss is a capital gain realised only when units are sold, so the two can fall in different years: see tax treatment of funds and F&O. A sold future against units already held is insurance on a holding. A short position with nothing held under it is a bet, and this lesson is not about that. RupeeCase's own hedging page says the same.
What is basis risk when hedging a fund with Nifty?
Basis is the gap between the thing hedged and the thing used to hedge it. Here it has three parts, and they add.
- Fund against index. The fund holds banks, or mid caps, or a theme, and Nifty holds fifty large stocks. The part of the fund's move that Nifty does not explain stays with the holder.
- Beta against the truth. Beta is a past slope. It drifts when the fund's holdings change, when the market moves from calm to stormy, and with the window chosen to measure it. A beta from a calm year can understate a fast fall, and the hedge is then too small just when it matters.
- Future against spot. On 2 Feb 2026 the March future stood 209.00 points above Nifty. That premium shrinks to nothing by expiry, so a seller of the future earns it: Rs 40,755 on three lots. See why futures trade above spot.
A Nifty hedge acts on the beta part of a fund only
Worked example: a bank heavy fund hedged with Nifty
The stand in for the fund is the bank index. It shares many stocks with Nifty, so it moves with it, and it is not Nifty. The chart shows both from 1 Jul 2025 to 15 Sep 2026, rebased to a common start. Their gap is the fund against index basis.
The bank index and Nifty moved together and still ended apart
| Assumed fund | 2 Feb to 30 Mar 2026 | 10 to 30 Jun 2026 |
|---|---|---|
| Nifty move | Down 11.0% | Up 2.8% |
| Bank index move | Down 14.2% | Up 4.4% |
| Sold Nifty lots | 3 | 4 |
| Hedge result | Gain Rs 5,78,370 | Loss Rs 1,62,669 |
| Net of fund and hedge | Loss Rs 1,33,315 | Gain Rs 58,981 |
| Fall, 2 Feb to 30 Mar 2026 | Rs lakh |
|---|---|
| Fund loss | 7.12 |
| Part beta explains: 1.10 times Nifty | 6.04 |
| Fund move beyond beta | 1.07 |
| Hedge gain, 3 lots | 5.78 |
| Beta part not offset (rounding, net of basis) | 0.26 |
| Left open after the hedge | 1.33 |
The hedge covered most of the fall and left a gap
The future's premium shrinks to near zero by expiry
Read 5 more paragraphs, 385 words
The holder sells Nifty futures against the Rs 50,00,000 fund and holds them to expiry. The fund is assumed to move one for one with the bank index, which is a simplification. In the fall Nifty closed at 25,088.40 on 2 Feb and 22,331.40 on 30 Mar, and the bank index at 58,619.00 and 50,275.35. A lot was 65 units and the exposure of 3.34 lots rounded down to 3. In the rise, on 10 Jun 2026, the June future was 23,240.10 with 20 days to run, so a lot was worth Rs 15,10,607 and the exposure was 3.64 lots, which rounds to 4. Nifty closed at 23,214.95 that day and 23,865.75 on 30 Jun, and the bank index at 55,100.30 and 57,542.90.
In the fall the bank index fell further than Nifty did, so the fund lost more than beta times Nifty says. Where did the Rs 1,33,315 come from? The table splits it.
The larger part, Rs 1,07,282, is the fund specific move that no Nifty future covers. The smaller part, Rs 26,033, is the beta part left after whole lots, helped by the Rs 40,755 that the basis paid the seller. In the rise the gap worked for the holder: the fund gained Rs 2,21,650 and the hedge gave back Rs 1,62,669. A gap is not a loss. It is the part of the result the hedge does not control, in both directions.
A closer index shrinks the gap. In June, 3 lots of 30 units of the bank index future, sold at 55,200.40 against an exposure of 3.02 lots, would have left a net Rs 10,825 against the Rs 58,981 left by the Nifty hedge. That is a match by construction here, since the stand in is that index. A real fund is never so close, and every closer instrument has its own lot size and its own depth of trading. Charges come on top. The three sold lots in February paid STT of Rs 987 on the sale, at the rate then in force. From 1 Apr 2026 the rate on futures is 0.05%.
The basis itself is not fixed. The chart of the March future's premium over Nifty follows it to expiry week, and it did not shrink in a straight line.
The common mistake
The belief: Nifty is the market, so a Nifty hedge covers any equity fund.
Test it on the fall. The three lots offset most of the Rs 6,04,403 that beta times Nifty predicts, with Rs 26,033 left over. The bank heavy fund also fell Rs 1,07,282 more than that, because it is not an index of fifty large stocks. In the rise the hedge handed back Rs 1,62,669 of the fund's gain. A Nifty future hedges the index part of a fund and nothing else. Before sizing one, ask how much of the fund's movement the index explains, and how stable the beta has been. The answer sets how wide the gap will be.
Key takeaways
- A fund's beta is a slope estimated from its returns against Nifty.
- R squared says how much of the fund the index explains.
- Fund against index, beta drift and future against spot make up the basis.
- The fund specific part of a move stays after any Nifty hedge.
- Whole lots always leave a sliver open.
- A hedge sits on units already held. It is not a view.
3 terms this section turns on
Before you trade. Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. Read the SEBI study