Sebi proposes new asset class for risk takers
July 16, 2024
The proposed asset class will be allowed to invest in all instruments permissible to mutual funds as well as in derivatives for purposes other than hedging and rebalancing, unlike in mutual funds.
The Securities and Exchange Board of India (Sebi) on Tuesday proposed a new asset class for investors with higher risk appetite and willing to put a higher amount – a move that is aimed at curtailing proliferation of unauthorised and unregistered products as well give another investment route to investors who wish to go that extra mile to earn more.
“The new asset class is proposed to be introduced under the mutual fund structure, with relaxations in prudential norms for such a new asset class to be adequately effective. 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,” Sebi said.
The product, which would be like hedge-fund-like product and positioned between mutual funds and portfolio management services, in terms of flexibility in portfolio construction. The hedge fund concept is very popular in global markets in which an investment manager uses a wide range of strategies to earn above-average investment returns.
In terms of ticket-size as well, the market regulator has set an investment threshold of Rs 10 lakh which falls neatly between a mutual fund where the minimum investment can be as low as Rs 100 and PMS and AIFs where the investment threshold are Rs 50 lakh and 1 crore, respectively.
The proposed asset class will be allowed to invest in all instruments permissible to mutual funds as well as in derivatives for purposes other than hedging and rebalancing, unlike in mutual funds.
The cumulative gross exposure through all investable instruments including derivatives and any other instruments should not exceed 100% of the net assets of the investment strategy. Further, it has put a cap of 50% on exposure to exchange traded derivative instruments, and 10% cap on exposure through single stock derivatives.
The new asset class will allow relaxed investment limits for debt securities, equity, and Real Estate Investment Trusts (REITs), enabling fund managers greater flexibility in portfolio allocation.
Radhika Gupta, MD & CEO of Edelweiss Mutual Fund wrote on X, “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.”
She added that asset management companies will build multiple centres of expertise on a platform rather than a single style or individual driven business in the future.
“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,” the regulator said in a consultation paper, inviting public comments by August 6.
There could also be an option of systematic investment or withdrawal plans for these investment strategies. However, at no point in time should the total invested amount of an investor fall below Rs 10 lakh due to actions of the investor such as withdrawals or systematic transactions, except for the depletion of the value of investments.
Further, mutual funds with assets under management (AUM) exceeding Rs 10,000 crore over three years or those managed by experienced Chief Investment Officers (CIOs) and fund managers will be eligible to launch this new asset class.
Trustees and sponsors of mutual funds intending to operate within this new asset class must seek Sebi’s approval before commencing operations. Investment strategies under the new asset class will allow fund managers to offer flexible redemption frequencies, catering to varying investor needs.
The regulator has also proposed a distinct branding for the new asset class as well as its risk-o-meter to differentiate it clearly from traditional mutual funds, thereby avoiding confusion among investors.
[The Financial Express]
