The Securities and Exchange Board of India (Sebi) has proposed the introduction of a new investment vehicle catering to investors willing to take riskier bets on the market but for whom portfolio management services (PMS) or alternative investment funds (AIFs) could be out of reach.
The regulator has proposed a minimum ticket size of Rs 10 lakh for this yet-to-be-named product category—much below the threshold of Rs 50 lakh for PMS and Rs 1 crore for AIFs. Meanwhile, the minimum investment size for mutual funds (MFs) can be as low as Rs 100.
“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 unauthorised investment products,” Sebi has said in a discussion paper. “Over the years, a notable opportunity for a new asset class has emerged between MFs and PMS in terms of flexibility in portfolio construction,” it added.
Sebi believes the absence of such a product has given an opening to unauthorised entities to lure investors with the promise of unrealistically high returns.
The regulator has said the structure of the proposed asset class will be akin to MFs, but they will be allowed to offer riskier investment strategies. For instance, MFs are allowed to deal in the derivatives market only for the purpose of hedging. Meanwhile, the new asset class will be permitted to have naked positions in the derivatives market. Similarly, various investment thresholds in debt securities or REITs and InvITs will be slightly more relaxed vis-à-vis MFs.
In the discussion paper, Sebi has proposed a clear differentiation of this new product and upfront disclosures of the risks involved so that investors do not confuse them with MFs.
“It is proposed to have a distinct nomenclature for the new asset class to distinguish it from traditional MFs and other investment products already available in the securities market such as PMS, AIF, REITs, and InvITs,” Sebi has said.
Sebi has proposed that the new asset class can be offered by existing asset management companies (AMCs) with a minimum of three years of track record and assets under management (AUM) of Rs 10,000 crore. Those not meeting these requirements too can apply as service providers provided certain criteria are fulfilled. For these, the AMC will have to appoint a chief investment officer with experience in fund management of at least 10 years and managing AUM of not less than Rs 5,000 crore. Further, an additional fund manager for the new asset class with experience in fund management of at least seven years and managing AUM of at least Rs 3,000 crore.
Sebi has invited public comments on various aspects of the new product category until August 6.
The proposal comes at a time when more and more domestic households are channelling their savings into the financial markets, lowering their reliance on traditional asset classes such as physical gold and real estate.