Sebi Proposes New Asset Class to Bridge Gap between Mutual Funds and Portfolio Management Services

The Securities and Exchange Board of India (Sebi) has proposed a new asset class that aims to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size. This new asset class is designed to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS-es) in terms of flexibility in portfolio construction.

According to a consultation paper released by Sebi on July 16, the new asset class will allow investors to invest even in derivatives for purposes other than hedging and rebalancing. The regulator has proposed that the minimum investment in this asset class be Rs 10 lakh across strategies, which means that mutual fund houses or asset management companies will offer these products. The products will be riskier than what is traditionally offered by MFs and therefore will be branded differently.

The consultation paper stated that the proposed New Asset Class seeks to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorized investment products. The regulator has said that the minimum investment amount has been decided to deter investors from going to unregistered PMS-es.

The consultation paper also mentioned that the minimum investment amount of Rs 10 lakh per investor at the level of the AMC/MF will deter retail investors from investing in this product, while attracting investors with investible funds between Rs 10 lacs – Rs 50 lacs who are today being drawn to unauthorized and unregistered portfolio management service providers.

Regarding investing in derivatives, the consultation paper said that it may be done as a way to take exposure in the market, and not just to hedge or rebalance the portfolio. However, it has suggested conditions under which this can be done. These conditions include:

• The cumulative gross exposure through all investable instruments, including derivatives and any other instruments as may be permitted by SEBI from time to time, should not exceed 100 percent of the net assets of the investment strategy.
• The total exposure through exchange-traded derivative instruments should not exceed 50 percent of the net assets of an investment strategy.
• The total exposure through derivatives of a single stock should not exceed 10 percent of the net assets of an investment strategy.
• The 50 percent limit need not be applicable to index funds or ETFs launched under the new asset class, on indices specified by the market regulator.

Sandeep Jethwani, Co-founder of Dezerv, believes that this is a significant step forward for India’s investment ecosystem. He said that it gives higher-risk profile investors access to regulated opportunities without the minimum thresholds of PMS and AIFs, which will drive asset managers to create innovative investment solutions and encourage wealth managers to deepen their expertise.

This new asset class is expected to provide a fantastic opportunity for India’s wealth creators, allowing them to take advantage of regulated investment opportunities without the minimum thresholds of PMS and AIFs. It will also encourage asset managers to create innovative investment solutions and wealth managers to deepen their expertise.

Historical Context:

The Securities and Exchange Board of India (Sebi) has been working to improve the investment landscape in India by introducing new regulations and products to attract more investors and provide them with a wider range of options. In recent years, Sebi has taken several steps to promote the growth of the mutual fund industry, including increasing the flexibility of portfolio construction and allowing mutual funds to invest in derivatives. The introduction of this new asset class is a continuation of this effort to provide investors with more choices and to curb the proliferation of unregistered and unauthorized investment products.

The concept of Portfolio Management Services (PMS) has been around in India for several years, but it has been criticized for being inaccessible to many investors due to high minimum investment requirements. The new asset class proposed by Sebi aims to bridge this gap by providing a regulated investment product that offers higher risk-taking capabilities and a higher ticket size, making it more accessible to a wider range of investors.

Summary in Bullet Points:

• Sebi has proposed a new asset class that aims to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size. • The new asset class will allow investors to invest in derivatives for purposes other than hedging and rebalancing, with conditions to ensure that the exposure to derivatives does not exceed certain limits. • The minimum investment in this asset class will be Rs 10 lakh across strategies, which is higher than the minimum investment required for mutual funds. • The new asset class is designed to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS-es) in terms of flexibility in portfolio construction. • The regulator has proposed this new asset class to curb the proliferation of unregistered and unauthorized investment products and to provide investors with a regulated investment product that offers higher risk-taking capabilities. • The minimum investment amount of Rs 10 lakh per investor at the level of the AMC/MF is intended to deter retail investors from investing in this product, while attracting investors with investible funds between Rs 10 lacs – Rs 50 lacs who are today being drawn to unauthorized and unregistered portfolio management service providers. • The new asset class is expected to provide a fantastic opportunity for India’s wealth creators, allowing them to take advantage of regulated investment opportunities without the minimum thresholds of PMS and AIFs. • It will also encourage asset managers to create innovative investment solutions and wealth managers to deepen their expertise.