EBI Introduces Proposal for a New Asset Class Aimed at Bridging Investment Gaps

July 17, 2024

The Securities and Exchange Board of India (SEBI) has put forward a proposal for a new asset class aimed at narrowing the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS).

Presently, investment choices span retail-focused Mutual Fund schemes with modest entry sizes to Portfolio Management Services and Alternative Investment Funds (AIFs) requiring larger minimum investments. However, there exists a noticeable disparity between MFs and PMS in terms of flexibility and risk-return characteristics. This gap has inadvertently driven investors toward unregistered and unauthorized investment schemes offering high returns but carrying significant financial risks.

In response to this issue, SEBI’s proposed New Asset Class aims to address the gap by providing a structured and regulated investment option. This initiative is targeted at investors with funds ranging from INR 10 lakh to INR 50 lakh, potentially diverting them from unauthorized PMS providers.

SEBI suggests a minimum investment threshold of INR 10 lakh per investor for this new asset class. Positioned within the MF framework, it will offer relaxed prudential norms to accommodate its specific characteristics.

The proposed asset class will broaden its scope to include derivatives for objectives beyond hedging and portfolio rebalancing. The aggregate gross exposure across all investable instruments, including derivatives, must not surpass 100% of the net assets of the investment strategy. Specifically, exposure through exchange-traded derivative instruments should not exceed 50% of the net assets, except for index funds or ETFs designated by SEBI. Furthermore, exposure through derivatives of any single stock should not exceed 10% of the net assets.

SEBI has proposed two eligibility routes to facilitate the introduction of products within the new asset class. The first route mandates a robust track record, requiring Mutual Funds to have operated for at least three years with an average Asset Under Management (AUM) of no less than INR 10,000 crore over the preceding three years. The second route permits newly registered or existing Mutual Funds that do not meet the stringent track record criteria to also launch products under the new asset class.

The registration procedure for the new asset class will follow a two-stage process involving in-principle and final approvals, mirroring the Mutual Funds’ registration process. SEBI will mandate trustees or sponsors of Mutual Funds to submit applications along with requisite undertakings and documentation.

Products within the new asset class will be labeled as ‘Investment Strategies’ and will function under a pooled fund structure akin to Mutual Fund schemes. The redemption frequency of these investment strategies can be customized to suit the nature of investments, facilitating effective liquidity management.

SEBI has invited feedback and recommendations from the public on different facets of the proposal.

Posted and reproduced in Public Interest by

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