SEBI proposes a regulated new asset class with higher investments: What it may mean for investors?

For aggressive or high-risk profile investors seeking higher returns, the market watchdog SEBI on Tuesday (July 16) proposed to introduce a new asset class that can fill the gap between conventional mutual funds and exclusive portfolio management services (PMS).

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, added SEBI’s consultation paper.

Key features of the new asset class as proposed by SEBI:

Minimum investment:  In its consultation paper, the regulator prescribed a minimum investment of Rs 10 lakh in the new asset class that could be allowed to deploy funds in derivatives for purposes beyond just hedging and rebalancing, noted a PTI report. This is relatively lower than the minimum investment requirement in the case of PMS which requires a minimum sum of Rs 50 lakh.

Risk profile: The new asset class targeted at high risk profile investors looking at relatively higher returns will carry risk higher than mutual funds.

Regulatory check: The new offering will be a regulated asset class unlike the otherwise burgeoning unauthorized investment schemes. 

Permissible investments and strategies: The consultation paper noted that the new asset class shall  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. SIP offering is also proposed in the new asset class.

What the SEBI’s new asset class may mean for investors?

Kaustubh Belapurkar, Director – Fund Research at Morningstar Investment Research India on the development said the SEBI’s consultation paper for introducing new product classes with higher investment minimums than Mutual Funds and more freedom to invest can help investors gain access to a newer set of strategies like Long short equities, inverse ETFs,etc.which can help them express specific views on the market. 

A higher investment minimum ensures smaller retail investors don’t invest into these  strategies with potentially higher risk as well as it allows asset managers flexibility in determining liquidity windows for these products, while continuing to be under the strong regulatory framework, he added.

Long-short equity fund 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.Inverse ETF aims to generate returns that are negatively correlated to the returns of the underlying index.

"India is finally opening up to different investment products, styles and approaches.Passive, factor, inverse ETFs, alts and more. There is no single way to invest," Radhika Gupta, MD and CEO of Edelweiss Mutual Fund said.

Dezerv Co-Founder Sandeep Jethwani said higher-risk profile investors can now access regulated opportunities without the high minimum thresholds of PMS and AIF or resorting to unregulated structures that bode really well for the protection of wealth that India creates.This new asset class is poised to leverage the exponential growth expected in managed assets (MFs, PMSs and AIFs) in the next 5-7 years, he added.

(With PTI Inputs)