Vasant G Hegde CFA, former banker, presently teaches at Manipal Academy of Higher Education, Bengaluru
Called a bridge between mutual funds (MFs) and portfolio management services (PMS), the “new asset class” proposed, earlier this month, by the Securities and Exchanges Board of India (Sebi), is an exercise to meet the rising risk appetite of the retail investors.
The backstory
In the last few decades, mutual funds have changed the way households save and invest. This trend has found favour with young India. Systematic investment plans or SIPs have become so popular that they constitute nearly one third of the total assets under management (AUM) of Rs 61 lakh crores. The incessant inflow is also posing a challenge for fund managers who are compelled to funnel money into markets which seem to have run ahead of fundamentals.
Fund houses have been offering a range of investment products that cater to the needs of retail, high net-worth and institutional investors with varying risk-reward profiles and investment horizons. However, their inability to provide a customised portfolio to investors, especially the high net worth individuals (HNIs), resulted in the launch of portfolio management services (PMS) with a ticket size of Rs 50 lakhs and alternate Investment funds (AIFs) with a higher ticket size of Rs 1 crore.
The absence of an investment product between mutual funds and PMS has nudged investors of this segment towards unauthorised investment schemes managed by unregistered entities with the promise of unrealistic returns. Many rich Indians for instance are investing in simple agreement for future (SAFE) market equity sold by overseas start-up companies.
So Sebi, has now stepped in with a consultation paper, inviting comments from the public on the proposed introduction of a “new asset class” aimed at bridging the gap between MFs and PMS in terms of flexibility in portfolio construction. Let us demystify their features.
Eligibility criteria for AMCs
All existing asset management companies (AMCs) who are in operation for a minimum of 3 years and have average AUM of Rs 10,000 crores or more in immediately preceding 3 years, can sell this asset. The criteria is different for new AMCs.
Branding of new asset class
As the products offered under the new asset class will be relatively riskier, a clear distinction will be maintained between the branding of products under it and those under the traditional MFs. It is proposed that this distinction is made with the use of specific nomenclature and disclaimers in advertisements of products.
Investment strategies
AMCs will offer investment strategies such as a long-short equity fund that delivers returns by taking both long & short positions in equity or an inverse equity fund that delivers returns that are negatively correlated with the underlying index. The redemption frequency could be tailored i.e daily, weekly ,fortnightly etc.
Minimum Investment
The minimum investment amount under the new asset class will be Rs 10 lakh per investor. This means an investor must invest a minimum of Rs 10 lakhs, across one or more investment strategies under the new asset class offered by the mutual fund. Investors will also have options of systematic plans like SIP or systemic withdrawal plan (SWP) or systemic transfer plan (STP).
Permissible investments
The new asset class will have the same products that the traditional MFs are permitted to invest under the Sebi (Mutual Funds) Regulations, 1996. Additionally, it will also take exposure in derivatives for purposes other than hedging and portfolio rebalancing.
Taxing of capital gains
The Sebi paper is silent on the taxation aspect but experts feel that the taxation could be similar to that of AIFs.
Though the new asset class will have flexibility in portfolio construction, investors need to understand the potential risks associated with the new offering and carefully evaluate their risk tolerance before investing.