Sebi’s new asset class, positioned between MFs and PMS: how will it benefit investors?

“The proposed New Asset Class intends to fill the gap between MFs and PMS by offering a regulated product featuring greater flexibility, higher risk-taking capability and a higher ticket size, to meet the needs of the emerging category of investors,” the Securities and Exchange Board of India (Sebi) said in a consultation paper on Wednesday (July 19).

What are the ticket sizes of MF and PMS investments?

PMS are a category of professional financial services in which a skilled portfolio manager and stock market manager provides customised investment solutions to high net-worth individuals (HNIs) who are looking to invest in instruments such as equity, debt, gold, etc. The minimum investment limit in PMS is Rs 50 lakh.

PMS are different from MFs, where the minimum investment limit is just Rs 100, and a pool of money is managed by a professional fund manager.

What is the objective of the proposed investment product?

Sebi said that because of the gap between investment opportunities available in MFs and PMS, some investors in the segment are getting drawn towards unauthorised investment avenues. The new asset class will help in curbing the proliferation of unregistered investment products.

The current range of investment products with varying risk-reward profiles are intended to meet the investment needs of retail, high net-worth, and institutional investors, Sebi said in the paper.

These products include MF schemes, which are focused on retail investors; PMS; and alternative investment funds (AIF), a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, to make investments in accordance with a defined investment policy for the benefit of the investors. The floor investment in AIF is Rs 1 crore.

“And so, a notable opportunity of a ‘New Asset Class’ has emerged between mutual funds and PMS in terms of flexibility in portfolio construction,” the Sebi paper said.

The absence of such a product appears to have nudged investors in this segment towards unregistered and unauthorised investment schemes/ entities that promise unrealistically high returns, exploiting the expectation of investors for better yields, and leading to potential financial risks, Sebi said.

“Therefore, a New Asset Class would provide a regulated and structured investment suited to the investors in this segment,” it said.

How will investments in the new asset class work?

The new asset class is proposed to be introduced under the MF structure, with relaxations in prudential norms necessary for such a product category to be effective. The enhanced risks due to the relaxations may be mitigated by putting a higher limit on the minimum investment size.

The minimum investment amount for the new asset class has been proposed at Rs 10 lakh per investor within the asset management company (AMC)/ MF. An AMC is an institution which manages and oversees operations of mutual funds.

This means that an investor must invest a minimum of Rs 10 lakh, across one or more investment strategies, under the new asset class offered by an AMC/MF. “This threshold shall deter retail investors from investing in this product, while attracting investors with investible funds between Rs 10 lakh and Rs 50 lakh, who are today being drawn to unauthorized and unregistered portfolio management service providers,” the market regulator said.

Like MF schemes, the new asset class will provide investors with an option of Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP).

Who will benefit from the new asset class and how?

Radhika Gupta, Managing Director and Chief Executive Officer of Edelweiss Mutual Fund, said the creation of a structure for differentiated, higher-risk strategies looked promising. “From the customer’s point of view, there is nothing like the convenience of the MF platform, regulated, transparent, with great features like SIPs, and now getting increasingly open for innovation,” she said.

Sandeep Jethwani, co-founder of Dezerv, a wealth management solutions provider, said higher-risk profile investors can now access regulated opportunities without the high minimum thresholds of PMS and AIF, or resorting to unregulated structures, which bodes well for the protection of wealth. However, he said that the decision on taxation — whether at the mutual fund level or under new norms — will be crucial for its adoption.

In the new category of products, an AMC can offer ‘investment strategies’ under pooled fund structure, akin to mutual funds schemes. The redemption frequency of these investment strategies can be tailored (daily/ weekly/ fortnightly/ monthly/ quarterly/ annually/ fixed maturity) based on the nature of investments to allow the investment manager to adequately manage liquidity without imposing undue constraints on investors.

Some of the investment strategies that may be permitted include:

i) Long-short Equity Fund: A fund that seeks to deliver returns by taking long and short positions in equity and equity-related instruments. For example, the fund may be bullish on the automobile sector and bearish on the IT sector, and may invest in both these sectors by going long on the automobile sector and short on the IT sector.

ii) Inverse ETF/ Fund: A fund that seeks to generate returns that are negatively correlated to the returns of the underlying index.

The new asset class will be able to take exposure in derivatives for purposes other than hedging and portfolio rebalancing, subject to compliance with relevant provisions. This will provide more flexibility and risk-taking in investments and potentially generate higher returns, SEBI said.