SEBI Proposes New Asset Class to Bridge Gap Between Mutual Funds and PMS

The Securities and Exchange Board of India (SEBI) is exploring the introduction of a new asset class targeted towards investors with higher risk tolerance and larger investible amounts. This initiative aims to create a regulated investment option that falls between traditional mutual funds and portfolio management services (PMS).

Rationale Behind the New Asset Class

• Bridging the Gap: Currently, a gap exists in the investment product spectrum for investors seeking higher risk-reward options with a ticket size between mutual funds and PMS.
• Curbing Unregulated Activity: SEBI seeks to deter investors from venturing into unregistered and potentially risky investment schemes by offering a safe and regulated alternative.

Proposed Features of the New Asset Class

• Route 1 (Strong Track Record): Mutual fund AMCs with a minimum 3-year track record, an average AUM exceeding ₹10,000 crore in the preceding 3 years, and a clean regulatory record.
• Route 2 (Alternate Route): AMCs with a Chief Investment Officer (CIO) having at least 10 years of experience managing an AUM of ₹5,000 crore or more, along with an additional fund manager with a minimum of 7 years of experience managing an AUM of ₹3,000 crore or more.
• Minimum Investment Threshold: ₹10 lakh per investor, aimed at attracting investors with investible funds between ₹10 lakh and ₹50 lakh and deterring retail investors from unsuitable investments.
• Investment Strategies: Offered under a pooled fund structure similar to mutual funds, with distinct branding and marketing compared to traditional mutual funds.
• Flexibility in Redemption: Frequency options ranging from daily to annual or fixed maturity, allow customised investment strategies.
• Potential Listing: Units of investment strategies with redemption frequencies exceeding a week may be listed on recognised stock exchanges.
• Systematic Investment Plans (SIPs): Investors may be offered options like SIPs, SWPs (Systematic Withdrawal Plans), and STPs (Systematic Transfer Plans) for managing their investments.
• Regulatory Oversight: All investment strategies require approval from trustees and SEBI before launch. Offer documents will largely mirror those of mutual funds unless specified otherwise.

Next Steps

SEBI has invited public comments on the consultation paper by August 6, 2024. Feedback on eligibility criteria and other aspects of the proposed new asset class will be considered before finalising the regulations.

This new asset class has the potential to provide a valuable investment avenue for investors seeking higher risk-reward opportunities within a regulated framework. However, it’s crucial to carefully consider individual risk tolerance and investment goals before investing in this segment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.