SEBI's Proposed 'New Asset Class' Will Be More Efficient Than PMS, AIFs, Say AMC CEOs
Among the key differentiators between the new investment option and mutual funds are ability to have concentrated portfolios.
A proposed new investment vehicle could shake up the asset management industry in India, providing investors with better risk-return prospects than mutual funds and a more efficient option than portfolio management services and alternative investment funds. Radhika Gupta, managing director and chief executive officer of Edelweiss Mutual Fund and Aashish Sommaiyaa, chief executive officer of WhiteOak Capital Asset Management, said as much in conversation with NDTV Profit.
In a consultation paper on Tuesday, the market regulator floated the proposal to launch a 'new asset class' that aims to fill the gap between mutual funds and PMSes and AIFs. While mutual fund schemes are targeted at retail investors with bite-size ticket sizes, the thresholds for PMS schemes and AIFs have been set at Rs 50 lakh and Rs 1 crore, respectively.
"What I do think it will challenge is the current set of PMS providers, Category-3 AIFs, simply because the ticket size becomes more accessible, the taxation becomes far more favourable and the operating conditions become better," said Gupta.
Among the key differentiators between the new investment option and mutual funds are their ability to have concentrated portfolios and to use derivatives to take exposure rather than just as a hedge.
The structure of the proposed investment vehicle will give it an advantage over PMS funds when it comes to tactically using derivatives, according to Sommaiyaa.
"In a PMS, you're running separate demat accounts for every customer and you may have hundreds of demat accounts by customer. So what happens for economies of scale and execution? You end up transacting as a pool and then allocating all those moneys to individual client accounts by the end of the day. This means that transacting in derivatives on a PMS platform is operationally quite a nightmare. So, most PMSes, if you see, they don't end up running many derivative positions," he said.
Since the new investment option is envisioned as part of the mutual fund umbrella of products, it will have a pooled structure, which makes the running of strategies that use derivatives like long-short equity funds more efficient.
This structure also provides a tax advantage, according to Gupta.
"Most importantly, when the PMS does the churn, investors are paying short-term or long-term capital gains tax on each trade. That doesn't happen in a mutual fund because there is pass-through taxation. So, I think consumers are likely to be meaningfully better off," she said.
There is also likely to be a tax advantage over Category-3 AIFs. Over the years, there have been many representations to review the taxation of these investments, but returns continue to be taxed as business income, said Sommaiyaa.
"My first level reading of this new asset class is that it will be a trust like a mutual fund and hence it is most likely that the tax status will be just like a mutual fund. You may use different nomenclature, but the fact is that it is a mutual fund trust structure. So, I have no reason to believe that it will be taxed differently from a mutual fund," he said.
What Will Costs Look Like?
To be sure, these are still early days, with feedback on the regulator's consultation paper yet to be submitted. However, the cost structure will likely be similar to what is currently followed by the asset management industry.
The mutual fund industry follows a graded expense structure based on the size of assets under management. Meanwhile, PMSes enter bilateral agreements depending on the size of the application. Here, the options include a fixed fee, a variable fee, a performance-linked fee, or even a purely alpha-linked fee, said Sommaiyaa.
"There is no reason to believe that this new asset class will be different from where we are, generally speaking. In a PMS, people go for variable fees and all, but ultimately, whichever way you count it, people are paying 1.5–1.75%," he said. "This is what people are paying in a mutual fund as well. So the market finds its own level and I don't see how this new asset class will be differently priced from what we are used to seeing regularly."
