SEBI to Introduce New Asset Class for Investors Seeking Higher Risks

The Securities and Exchange Board of India (Sebi) has proposed a new asset class for high-risk investors, aiming to bridge the gap between mutual funds and portfolio management services (PMS). This new class will cater to investors with a higher risk appetite and a minimum investment of Rs 10 lakh.

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Sebi's consultation paper suggests that this asset class could invest in derivatives beyond just hedging and rebalancing. The goal is to offer a regulated product with greater flexibility and higher risk-taking capability. This would meet the needs of emerging investors.

Investment Thresholds and Strategies

The proposed asset class will be introduced under the mutual fund (MF) structure, with relaxed prudential norms. These relaxations may increase risks, but a higher minimum investment size can mitigate them. The minimum investment amount is set at Rs 10 lakh per investor at the level of the new asset class within the asset management company (AMC).

This threshold aims to deter retail investors while attracting those with investible funds between Rs 10 lakh and Rs 50 lakh. These investors are often drawn to unauthorised and unregistered portfolio management service providers. Systematic plans like systematic investment plans (SIPs) may also be available for this new asset class.

Market Reactions and Expert Opinions

Market experts believe this could be transformative for the industry. Dezerv Co-Founder Sandeep Jethwani said, "Higher-risk profile investors can now access regulated opportunities without the high minimum thresholds of PMS and AIF or resorting to unregulated structures that bode really well for protection of wealth that India creates."

Edelweiss Mutual Fund MD and CEO Radhika Gupta added, "India is finally opening up to different investment products, styles and approaches. There is no single way to invest." This new asset class is expected to leverage the exponential growth in managed assets like MFs, PMSs, and AIFs over the next 5-7 years.

Eligibility Criteria for AMCs

Sebi has suggested two routes for AMCs to offer products under this new asset class: a strong track record or an alternate route. For a strong track record, an MF should have been in operation for at least three years with an average Asset Under Management (AUM) of Rs 10,000 crore over the preceding three years. No action should have been taken against the sponsor or AMC during that period.

AMCs not meeting these criteria can still launch the new asset class if they comply with certain requirements. These include appointing a chief investment officer (CIO) with at least 10 years of fund management experience and managing AUM of Rs 5,000 crore. An additional fund manager with seven years of experience managing AUM of Rs 3,000 crore is also required.

Registration Process and Distinct Nomenclature

The registration process for this new asset class will be a two-stage process: in-principle approval followed by final approval, similar to the current MF registration process. The trustees or sponsor of an MF need to file an application with Sebi, submitting required undertakings and documentation.

The new asset class will not require segregated net worth or infrastructure specifically for it but will represent a new arm under the broader mutual fund umbrella. It should be positioned as distinct from traditional MFs in terms of branding and advertisement.

Redemption Frequency and Public Comments

The redemption frequency for these investment strategies can be tailored based on the nature of investments. This allows investment managers to manage liquidity without imposing undue constraints on investors. Sebi has sought public comments on these proposals until August 6.

This initiative aims to provide high-risk investors with more regulated opportunities while ensuring adequate protections are in place. The introduction of this new asset class could significantly impact India's investment landscape.