Through a Consultation Paper dated July 16, 2024 (“Paper”), the Securities and Exchange Board of India (SEBI) has proposed a New Asset Class that will permit Asset Management Companies (AMCs) to offer new sets of investment products, including investment in derivatives or derivative strategies, to Indian investors.
The existing range of investment products are intended to meet the needs of retail, high net-worth and institutional investors, ranging from mutual fund schemes with a low-ticket size to Portfolio Management Services (PMS) with a ticket size of INR 50 lakhs and Alternative Investment Funds (AIFs) with a minimum investment value of Rs 1 crore. However, the current regulatory framework provides no handholding to a retail investor who wishes to invest, say, Rs. 20 lakhs in direct equity. The proposed New Asset Class is aimed at bridging this gap between mutual funds and PMS and is envisaged to provide investors with a regulated investment product with higher risk-taking capabilities.
In terms of the Paper, in the absence of favourable regulatory architecture, retail investors are becoming vulnerable to falling for unregistered and unauthorized investment products, which often promise unrealistically high returns and exploit the investors’ expectations for better yields. A New Asset Class, intended to have a return risk-profile between mutual funds and PMS, would serve as a customized investment product offering greater flexibility, higher risk-taking capability and a higher ticket size, to meet the needs of this emerging category of investors.
SEBI has proposed for this New Asset Class to operate under the mutual fund structure but with relaxed prudential norms and with a redemption frequency tailored based on the nature of investments to allow the investment manager to adequately manage liquidity without imposing constraints on the investors. However, it has been clarified that no investment strategy under the New Asset Class may be launched by an AMC unless the same is specified by SEBI and approved by the trustees, subject to final observations on the offer documents by SEBI. The Paper also proposes a minimum investment amount of Rs. 10 lakhs per investor, across one or more investment strategies under the New Asset Class offered by an AMC. This threshold, in SEBI’s view, will deter retail investors from investing in this product, while attracting investors with investible funds between Rs. 10 lakhs – Rs. 50 lakhs who are being drawn to unregistered PMS providers.
It has been proposed that all investments permissible to mutual funds under the current regulatory framework will also be available for the New Asset Class. Additionally, the New Asset Class will be permitted to take exposure in derivatives for purposes other than hedging and portfolio rebalancing to allow more flexibility and risk-taking in investments. Investors will also be given the option of systematic plans, including withdrawals and transfers, for investment strategies under the New Asset Class, though at no point in time the total invested amount of an investor should fall below Rs. 10 lakhs for reasons other than depletion in the value of the investments.
SEBI’s proposal for a New Asset Class is in line with its objective to democratize the securities market and make it more accessible for average Indians. With the proliferation of ‘finfluencers’ and the consequent rise in misinformation in the investment advisory space, the proposed New Asset Class would provide new avenues for that particular category of investors who are likely to be propelled towards unregistered and unauthorized investment schemes while seeking flexibility in portfolio construction along with higher risks and returns. The initiative also paves the way for adopting thematic investment strategies like electric vehicles, water management, recycling, and renewable energy, which could notably advantage both mass affluent and high net-worth individual investors.
A New Asset Class coupled with the convenience provided by regulated mutual fund platforms will not only facilitate ease of investment but will also promote the concept of domestic mutual fund participation in sophisticated investment strategies, including in long-short equity and inverse ETF. That being said, SEBI should not restrict the proposed investment product to only AMCs but consider permitting other registered intermediaries to offer products under the New Asset Class. Alternatively, SEBI may consider creating an altogether new category of a registered intermediary to provide this investment option, which could be regulated by a separate set of rules with much less compliance burden and restrictions than those on mutual funds/AMCs.
Overall, the introduction of a New Asset Class by SEBI reflects its commitment to foster innovation and growth in the Indian financial markets. While it remains to be seen how the proposed investment product will unfold, this promising move by SEBI will contribute to the creation of dynamic and inclusive financial market, offering diverse investment opportunities and catering to different categories of Indian investors.
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