The Securities and Exchange Board of India (SEBI) has introduced a proposal for a new asset class designed to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS).
Current investment options range from retail-oriented Mutual Fund schemes with low ticket sizes to Portfolio Management Services and Alternative Investment Funds (AIFs), which require higher minimum investments. Despite this range, there is a gap between MFs and PMS in terms of flexibility and risk-return profiles. This gap has inadvertently pushed investors towards unregistered and unauthorized investment schemes that promise high returns but carry substantial financial risks.
To address this, SEBI's proposed New Asset Class is designed to fill this gap by offering a structured and regulated investment product. This new class aims to attract investors with investable funds between INR 10 lakh and INR 50 lakh, who might otherwise turn to unauthorized PMS providers.
SEBI has proposed that the minimum investment amount for the new asset class be set at INR 10 lakh per investor. The new asset class will be positioned under the broader MF structure but will feature relaxations in prudential norms.
The proposed asset class will also allow investments in derivatives for purposes beyond hedging and portfolio rebalancing. The cumulative gross exposure through all investable instruments, including derivatives, should not exceed 100% of the net assets of the investment strategy. The total exposure through exchange-traded derivative instruments should not exceed 50% of the net assets, with exceptions for index funds or ETFs specified by SEBI. Additionally, the total exposure through derivatives of a single stock should not exceed 10% of the net assets.
To facilitate the launch of products under the new asset class, SEBI has suggested two routes for eligibility. The first route requires a strong track record, where the Mutual Fund should have been in operation for at least three years with an average Asset Under Management of not less than INR 10,000 crore in the preceding three years. The second route allows newly registered or existing Mutual Funds that do not meet the strong track record criteria to launch the new asset class.
The registration process for the new asset class will be a two-stage process with in-principle and final approvals, similar to the registration process for Mutual Funds. SEBI will require trustees or sponsors of MFs to file applications along with necessary undertakings and documentation.
The products under the new asset class will be referred to as 'Investment Strategies' and will operate under a pooled fund structure similar to MF schemes. The redemption frequency of these investment strategies can be tailored based on the nature of investments to allow for adequate liquidity management.
SEBI has sought comments and suggestions from the public on various aspects of the proposal.