Sebi proposes new asset class placed between MFs and PMS for higher risk takers

(Representational image)

The market regulator has proposed a new asset class that could bridge the the gap between Mutual Funds and Portfolio Management Services (PMS-es) in terms of flexibility in portfolio construction. It has proposed that the asset class be allowed to invest even in derivatives for purposes other than hedging and rebalancing.

Through a consultation paper released on July 16, the Securities and Exchange Board of India (Sebi) has proposed that the minimum investment in this asset class be Rs 10 lakh across strategies, that mutual fund houses or asset management companies offer these products, that the products will be riskier than what is traditionally offered by MFs and therefore be branded differently and that all investments permissible to MFs be available to this new asset class.

Also read: MC Exclusive: Sebi search and seizure on traders who seem to have profited from non-public information on regulatory action

The consultation paper stated, "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  has been decided to deter them from going to unregistered PMSes.

The consultation paper said, "The minimum investment amount for investment under the New Asset Class shall be INR 10 lakh per investor at the level of the New Asset Class within the AMC/MF. This means an investor must invest a minimum of INR 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 INR 10 lacs – INR 50 lacs, who are today being drawn to unauthorized and unregistered portfolio management service providers".

Investing in derivatives

On 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. But it has suggested conditions under which this can be done.

One, 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.

Two, the total exposure through exchange traded derivative instruments should not exceed 50 percent of the net assets of an investment strategy.

It also said that 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.

Three,  the total exposure through derivatives of a single stock should not exceed 10 percent of the net assets of an investment strategy.

Sandeep Jethwani, Co-founder, Dezerv, said, "This is a significant step forward for India’s investment ecosystem. Most importantly this is a fantastic opportunity for India’s wealth creators".

Jethwani said that it gives higher-risk profile investors access to regulated opportunities without the minimum thresholds of PMS and AIFs, it will drive asset managers to create innovative investment solutions and that it encourage wealth managers to deepen their expertise.