SEBI Proposes Product To Bridge Gap Between Mutual Funds, Portfolio Management Services

The Securities and Exchange Board of India on Tuesday proposed the introduction of a new asset class category that will provide investors with regulated investment products, featuring higher risk-taking capabilities and ticket size.

The market regulator said that the idea behind such a product is to bridge the gap between mutual funds and portfolio management services in terms of flexibility. SEBI also intends to curb the proliferation of unregistered and unauthorised investment products, it said in a consultation paper on Tuesday.

The proposed regulatory framework will enable higher risk-taking than mutual funds, while containing commensurate safeguards and risk mitigation measures, it said.

The board has sought suggestions for the nomenclature of the new asset class.

SEBI has placed a minimum investment amount under the new asset class at Rs 10 lakh per investor across one or more investment strategies. The higher threshold seeks to deter retail investors while attracting those with investible funds between Rs 10-50 lakh, "who are today being drawn to unauthorised and unregistered portfolio management service providers".

Currently, mutual fund schemes are retail-oriented with a low ticket size, while PMS and Alternative Investment Funds have a minimum investment value of Rs 50 lakh and Rs 1 crore, respectively.

The new asset class will have a distinct nomenclature to distinguish it from traditional investment products already available. Systematic investment plan, systematic withdrawal plan and systematic transfer plan will also be offered.

SEBI said mutual funds shall be in operation for a minimum of three years and have average assets under management of not less than Rs 10,000 crore to be eligible to launch the new asset class.

An asset management company can offer 'investment strategies' under the pooled fund structure, akin to mutual fund schemes, and where redemption frequency can be flexible. The units of such investment strategies can be listed on the stock exchanges.

SEBI said a fund that seeks to deliver returns by taking long and short positions in equity and equity-related instruments can be permitted.

Likewise, a fund that aims to generate returns that are negatively correlated to the returns of the underlying index (called inverse ETF) will also be allowed.

Sector-level limits for debt securities shall be 25%, while derivatives may be allowed for the purpose of taking exposure. The total exposure through exchange-traded derivative instruments shall not exceed 50% of the net assets of an investment strategy, SEBI proposed.

The consultation paper will be open for public comments till Aug. 6.

SEBI's proposal "looks very promising", said Edelweiss Mutual Fund MD and CEO Radhika Gupta. "India is finally opening up to different investment products, styles and approaches," she said.

Asset management businesses of the future will build multiple centres of expertise on a platform rather than a single-style or individual-driven business, according to her.