Markets regulator Sebi on Tuesday proposed introducing a new asset class to bridge the gap between mutual funds and portfolio management services (PMS) by looking to tap investors having investible funds between Rs 10 lakh and Rs 50 lakh.

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The new asset class will provide a regulated product featuring greater flexibility, higher risk-taking capability, and a higher ticket size, to meet the needs of the emerging category of investors, Sebi said.

On minimum investment, Sebi has proposed that the minimum amount for investment under the new asset class should be Rs 10 lakh per investor.

"This threshold shall deter retail investors from investing in this product while attracting investors, with investible funds between Rs 10 lakh and Rs 50 lakh, who are today being drawn to unauthorised and unregistered PMS providers," Sebi said in its consultation paper.

The proposed new asset class is aimed at curbing the proliferation of unregistered and unauthorised investment products.

"The new asset class is proposed to be introduced under the mutual fund (MF) structure, with relaxations in prudential norms for such new asset classes to be adequately effective," it said.

"While such relaxations may enhance the risks associated with the product, the same can be mitigated by putting a higher limit on minimum investment size," the paper said.

Investors may also have an option of systematic plans such as systematic investment plan (SIP) for investment strategies under the new asset class.

Further, the investment strategies under the new asset class can invest in derivatives or derivative strategies as a way of taking exposure in the market.

Sebi said the proposed asset class should have a distinct nomenclature for the new asset class to distinguish it from traditional mutual funds and other investment products already available in the securities market such as PMS, AIF (alternative investment funds), REITs, INVITs, among others.

To facilitate existing and newly registered Asset Management Companies (AMCs) to offer products under the New Asset Class, Sebi has suggested two routes of eligibility criteria -- strong track record or alternate route.

On a strong track record, an MF should be in operation for a minimum of three years and have an average Asset Under Management (AUM) of at least Rs 10,000 crore in the preceding three years and no action should have been taken against the sponsor or AMC in the last three years, as per Sebi.

Further, MFs not fulfilling the requirement of strong records should also be eligible to launch the new asset class. This is subject to compliance with the certain requirements such as AMC should appoint chief investment officer (CIO) for the new asset class with an experience of fund management of at least 10 years and managing AUM of at least Rs 5,000 crore and an additional fund manager for the such asset class with experience of at least seven years and managing AUM of at least Rs 3,000 crore.

Sebi said the trustees or sponsor of an MF needs to file an application with the regulator and submit required undertakings and documentation.

The registration process for new asset classes should be a two-stage process, consisting of in-principle and final approvals, similar to the registration process currently followed for MFs.

"While the sponsor may not be required to maintain segregated net worth or infrastructure specifically for the new asset class, the new asset class shall represent a new arm/service offered under the broader umbrella of mutual fund," Sebi said.

It has been proposed that the new asset class should be positioned as a product distinct from the traditional MFs, both from branding and advertisement perspectives.

Under the new asset class, the AMC can offer investment strategies under pooled fund structure, akin to MF schemes. This nomenclature has been proposed to differentiate between the MF schemes being managed by AMCs and the schemes under the new asset class.

The redemption frequency of these 'investment strategies' can be tailored based on the nature of investments to allow the investment manager to adequately manage liquidity without imposing undue constraints on investors.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till August 6 on the proposals.