Sebi’s New Asset Class: What Does It Mean For Investors?

The Securities and Exchange Board of India (Sebi), the capital markets regulator, has proposed a new asset class, a hybrid of mutual funds (MFs) and asset management services (PMS). It aims to bridge the gap between MFs and PMS by offering greater flexibility, higher risk appetite and larger ticket size.

The asset class, which Sebi had proposed in a consultation paper, will have a minimum ticket size of Rs 10 lakh.

In the consultation paper, Sebi had said: “(The new asset class) aims to provide investors with a regulated investment product with higher risk appetite and higher ticket size, aimed at curbing the proliferation of unregistered and unauthorised investment products.”

All existing MFs that have been in operation for three years and are managing an AUM of Rs 10,000 crore or more are eligible to launch this new asset class. Alternatively, fund houses with a CIO with 10 years of experience in managing an AUM of Rs 5,000 crore and an additional fund manager for NAC with a minimum of seven years of experience with an AUM of Rs 3,000 crore can also launch NAC. Finally, there should be no complaints against the sponsor and the AMC for the last three years.

In this new category, AMCs can launch long equity funds and inverse ETF funds.

This new asset class is expected to be more flexible than mutual funds; the single issuer limit is 20% of NAV, while in MFs it is 10%; investors can invest 12% of NAV in A-rated and below debt securities, while in MFs this limit is 6% and 20% of NAV can be invested in REITs (10% of NAV in MFs).

Ajit Menon, CEO, PGIM MF, welcomed the proposal and said that this will open up new opportunities for the wealthy with higher risk appetite and give them something more than just a run-of-the-mill MF. He also said, “We are seeing too much traction in the sectoral/thematic category in MFs, which is quite risky for retail investors as they are just chasing performance. With this new asset class, a lot of risky funds can be shifted to this new asset class, which can protect retail investors from excessive risk.”

Madhu Nair, CEO of Union MF, believes the new asset class will have lucrative tax implications, similar to MFs, and will help create a more differentiated product.

Jimmy Patel, CEO of Quantum MF, believes that derivatives exposure other than hedging and portfolio rebalancing will also provide more flexibility and higher returns to investors. He said, “This product will specifically appeal to HNIs as it will be a multi-asset product and will offer them more diversity.”

Daniel GM, Founder-Director, PMS Bazaar, believes that this new asset class could lead to migration of mutual fund investors to this new asset class and create more competition among the AMCs to launch new NACs. He also said, “We have to wait and see what differentiated value this new asset class adds to the investors as there are already existing structures in the sector.”