The equity savings fund of Sunandini Mutual Fund hedges part of its equity with index futures. A missed rollover left 8% of NAV unhedged on a day the market fell 4%. What did the lapse cost, why did the controls fail, and what should change?

The lapse cost 0.32% of NAV, about Rs 9.6 crore: 8% of NAV left unhedged through a 4% fall. Three controls failed together: the roll depended on one person, the order system checked gross rather than net equity, and the net exposure report ran after the market closed. The fix is to roll before expiry with a second person, put a live net equity limit in the order system, and have the AMC make investors whole for a loss caused by its own breach.

Think of a monthly train pass that expires on Thursday. If you forget to renew it and ride on Friday, the fine is for Friday only; the trips you had paid for were never the problem. The fund was meant to carry 30% net equity, so its loss on that 30% was the planned risk; the error is only the extra 8% left exposed. 8% of NAV times a 4% fall is 0.32% of NAV. On Rs 3,000 crore that is Rs 9.6 crore, and an investor with Rs 10 lakh lost Rs 3,200 they should not have.

Put it beside the planned loss. With net equity at 30%, a 4% fall should have cost 1.20% of NAV; with 38%, it cost 1.52%. The fund lost about a quarter more than its design allowed on a single day. And the cost would have been the same size if the market had risen 4%: an unintended gain is still a failure, because the fund took a risk its investors had not agreed to. A strong answer says this before anyone asks.

Each control had a hole, and on this day the holes lined up, the pattern risk teams call the Swiss cheese modelA way of describing failures in which several imperfect controls each have gaps, and an accident happens only when the gaps line up.. The expiry calendar lived with one dealer and had no backup while he was on leave. The order management system checked the fund's gross equity against its limit, and gross equity did not change when futures expired. The one control that measured the right thing, net exposure, ran at the end of the day, which is after the loss rather than before it.

The fixes follow the holes. Roll futures two or three days before expiry as a standing rule, so a missed roll is caught while the old contract is still alive. Send automated expiry alerts to the dealer, a named backup and the risk team. Put a live net equity check in the order system that warns, or blocks trades, when net exposure approaches the scheme's limit. Reconcile hedges against positions at expiry on expiry day, not the next evening. And add a desk procedure for leave, so no process depends on one person.

On the loss: the net equity went outside the range stated in the scheme document because of the AMC's own operational failure, not a market judgement. Under SEBI's framework and most AMCs' error policies, the AMC is expected to make good investors' losses from such a breach, report it to the trustees and record it; confirm the current requirements. The investors did not choose the extra risk, so they should not bear its cost. The incident also belongs in the board's risk report, with the fix and a date by which it will be tested.