India’s investment ecosystem is seeing rapid growth in both traditional and alternative avenues. The mutual fund industry, a major investment avenue for retail participants, has ₹59 trillion in assets under management as of June 2024. The alternative assets industry, comprising alternative investment funds and portfolio management services, grew at a CAGR of 26% between June 2019 and June 2024, with assets under management touching ₹13.74 trillion.
Given the enormous interest in the Indian markets and the large gap between the minimum ticket sizes of retail and alternative avenues, the Securities and Exchange Board of India has come up with an innovative proposal that aims to add breadth to India’s investment ecosystem.
Bridging the gap
The markets regulator has proposed a new asset class tailored to high-risk investors that offers access to innovative strategies such as long-short equity and inverse exchange-traded funds (ETFs). This asset class is designed to bridge the gap between mutual funds and PMS and provide greater flexibility. Sebi’s consultation paper on the new asset class and its structure is hugely promising and signifies India’s readiness to embrace diverse investment products, styles and approaches.
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According to the consultation paper, the new asset class is meant to cater to the growing number of affluent investors who are able and willing to take on more risk. The proposed minimum ticket size is ₹10 lakh – in the sweet spot between the ₹500 minimum ticket size for mutual fund SIPs, and the ₹50 lakh for PMS opportunities. The new asset class may be allowed to invest in derivatives for purposes beyond mere hedging and rebalancing. This would significantly expand the landscape for high-risk investors looking to explore advanced strategies and diversify their portfolios.
In a recent report, Goldman Sachs estimated that the number of affluent Indians – those who earn more than $10,000 or ₹8.37 lakh a year – would touch 100 million by 20273, bolstered by consistently strong economic growth and a stable monetary policy. About 60 million Indians currently meet this criteria, as against 24 million in 2015. While they represent just 4.1% of the total population, their numbers are growing every year.
Made to measure
This emerging affluent class is keen on high risk, high return investments and thus likely to explore Sebi’s proposed new asset class. While some will be put off by the ₹10 lakh minimum ticket size, it will attract those who might otherwise have turned to unauthorised and unregistered portfolio management services.
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The new product will give such investors access to advanced strategies such as long-short equity and inverse ETFs, and at a lower ticket size those of PMS and AIFs. A long-short equity fund aims to deliver returns by taking both long and short positions in equity instruments – for example, a fund that’s bullish on the financial sector and bearish on FMCG will be able to take long positions in the former and short positions in the latter. Inverse ETFs are designed to generate returns that are negatively correlated with the underlying index.
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This new asset class is set to capitalise on the expected exponential growth in managed assets such as mutual funds, PMS, and AIFs over the next five to seven years. With the affluent class growing in both numbers and ambition, it could also act as a stepping stone for high-risk investors looking to eventually enter the arenas of AIFs and co-investing.
Nikunj Kedia is head of products at 360 ONE Wealth.