The Securities and Exchange Board of India (Sebi) has invited comments on its proposal to introduce a new asset class or product category aimed at bridging the gap between mutual funds (MFs) and Portfolio Management Services (PMS).
In a consultation paper released today, Sebi clarified that the new asset class sought to provide investors with a regulated investment product featuring higher risk-taking capabilities and higher ticket size. It aimed to curb the proliferation of unregistered and unauthorized investment products.
Mint had reported in October about Sebi’s communication to the Association of Mutual Funds in India (Amfi) seeking the views of individual asset management companies on a new mutual fund category.
At an event in December, Sebi chairperson Madhabi Puri Buch also expressed that the regulator “saw room for an asset class between PMS and mutual fund.”
In the consultation paper, Sebi noted that the investment management landscape in India had significantly evolved over the years.
“Sebi has adopted a segmented risk-based approach to regulation of these products depending on their complexity, sophistication of target investors, minimum investment size, etc., with the over-arching objective of diversifying investment avenues while protecting the interest of investors,” the paper said.
The current investment products range between mutual fund schemes which are retail-oriented with a low-ticket size, PMS with a ticket size of ₹50 lakh and alternative investment funds (AIFs) with a minimum investment value of ₹1 crore.
An opportunity for a new asset class has emerged between mutual funds and PMS in terms of flexibility in portfolio construction, Sebi said, pointing out that the absence of such a product would inadvertently propel investors of this segment towards unregistered and unauthorized investment schemes/entities.
Sebi accordingly proposed a regulatory framework for the new asset class to enable higher risk-taking than mutual funds while maintaining safeguards and risk mitigation measures.
The minimum investment under this class has been fixed at ₹10 lakh per investor.
The regulator also proposed that the MFs or asset management companies (AMCs) that are offering this new asset class should have been in operation for at least 3 years with an average Asset Under Management (AUM) of ₹10,000 crore in the immediately preceding 3 years.
It was proposed that the new asset class be positioned as a product distinct from the traditional mutual funds both from branding and advertisement perspectives, Sebi said.
Sebi clarified that the new asset class would be able to take exposure in derivatives for purposes other than hedging and portfolio rebalancing. It stated further that the gross exposure in investable instruments should not exceed 100% of the net assets of the investment strategy. For exchange-traded derivative instruments the limit was 50% of the net assets of the investment strategy and for derivatives of a single stock it was limited to 10% of the net assets of the investment strategy.
Deepak Shenoy, founder and CEO of Capital Minds said, “In many ways this consultation paper allows MFs to go beyond PMS and do things PMS cannot do like the use of derivatives and in a tax-efficient manner. I hope over time even PMS managers are allowed to launch strategies using this structure. Since the exposure minimum is ₹10 lakh across the whole asset class, an investor can take exposure to it across multiple strategies—let’s say by investing a few lakhs in each strategy.”