New asset class: Will promote concept of domestic MF participation in F&O, Deepak Shenoy on Sebi's proposal

Sebi's new asset class: Hours after the SEBI floated its idea to launch a new asset class, which will have more flexibility than a regular mutual fund scheme and lower ticket size than portfolio management services (PMS) and will cater to investors with a high-risk appetite. 

The new investment asset will be offered under the mutual fund (MF) structure, with new branding and relevant relaxations in existing MF norms. The minimum ticket size is proposed to be Rs 10 lakh, one-fifth that of PMS schemes and one-tenth of alternative investment products.

“The proposed asset class seeks to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorized investment products,” the paper said.

Reacting to the new scheme, Deepak Shenoy, Founder and CEO at Capitalmind, said the idea is excellent as it will allow things that investors can do individually on their own, and that FIIs can do, but domestic mutual funds could not (and neither could a PMS). 

He added that it will promote the concept of domestic MF participation in F&O, which is needed as an institutional balance to FII participation. 

He further noted a few points:

The new proposal by SEBI for slightly high net worth investors, will allow mutual funds to create a concept called "Investment Strategies" that can

a) use futures and options for positions (rather than only for hedging/balancing)

b) using more complex or innovative strategies like inverse funds which benefit from the market falling

c) invest more than 10% per stock (15%) and have looser limits for credit concentration in debt; and is limited to investors putting Rs 10 lakh overall across all investment strategies (so you can have 5 lakh each in two such strategies by the same fund house)

He added: "I hope PMS managers will eventually be allowed this asset class, because it's tax efficient, but it's currently only proposed for mutual fund AMCs to separately apply."

The current investment products consist of various options available to investors. These include mutual fund schemes, which are designed for retail investors and typically have a low minimum investment requirement. In addition, there are PMS with a minimum investment amount of Rs 50 lakh, targeting investors with higher net worth. Furthermore, Alternative Investment Funds (AIFs) are also available for investors looking to diversify their portfolio, with a minimum investment value of Rs 1 crore. Each of these investment products caters to different investor profiles and financial capabilities.

Shenoy added the new asset class in many ways will allow MFs to go beyond PMS and do things PMS cannot do like the use of derivatives.

“In many ways this consultation paper allows MFs to go beyond PMS and do things PMS cannot do like the use of derivatives and in a tax-efficient manner. I hope over time even PMS managers are allowed to launch strategies using this structure. Since the exposure minimum is ₹10 lakh across the whole asset class, an investor can take exposure to it across multiple strategies—let's say by investing a few lakhs in each strategy,” Shenoy said.

Anirudh Garg, Partner and Fund Manager at Invasset, said: "The recent SEBI consultation paper proposing a new asset class positioned between mutual funds and PMS represents a progressive move for the Indian investment landscape. We view this initiative as a crucial step to address the needs of investors seeking greater flexibility and higher risk exposure than traditional mutual funds, while not committing to the exclusivity of PMS. This new asset class is designed to curb unregistered investment products and provide a regulated, yet flexible, option for sophisticated investors. It allows for innovative investment strategies, including the use of derivatives and long-short positions, which can potentially generate higher returns and manage risks effectively.

"Furthermore, this new asset class maintains clear distinctions from traditional mutual funds in branding and advertising, ensuring that investors can make informed decisions. The tailored redemption frequencies based on the nature of investments will also help in managing liquidity effectively. Overall, we believe SEBI's initiative is a timely and necessary evolution, offering more options and greater flexibility for investors while maintaining the regulatory oversight needed to protect investor interests," Garg added.

Niranjan Avasthi, Senior Vice President, Edelweiss MF, said: "The New Asset Class offers a compelling structure for AMCs to explore unique and high risk high return investing strategies with enhanced flexibility. Most importantly, in a tax efficient way. Existing AIFs and PMS could be at a disadvantage."

He also noted different features of the new asset class.

Minimum Investment Size:

MFs: INR 500 (some SIPs from INR 100). NAC: INR 10 lakh per investor. Single Issuer Limit for Debt Securities:

MFs: 10% of NAV (up to 12% with approvals). NAC: 20% of NAV (up to 25% with approvals).

Credit Risk-Based Limits:

MFs: AAA: 10% AA: 8% A & below: 6% (+2% with approval) NAC: AAA: 20% AA: 16% A & below: 12% (+5% with approval)

Ownership of Voting Rights:

MFs: 10%. NAC: 15%. NAV Exposure to Equity Instruments:

MFs: 10%. NAC: 15%

Investment in REITs and InvITs:

MFs: 10% total; max 5% in a single issuer. NAC: 20% total; max 10% in a single issuer.

Sector Level Limits:

MFs: 20% per sector. NAC: 25% per sector.

Use of Derivatives:

MFs: Allowed only for hedging. NAC: Can also use for exposure.

Branding and Distinction:

NAC: Unique branding to emphasize higher risk. MFs: Recognized as lower-risk options for retail investors.

Risk Disclosure: NAC: Unique risk-o-meter for higher risk; monthly portfolio disclosures. MFs: Standardized risk-o-meter with regular disclosures.