India's mom-and-pop investors may get a taste of the big league if this Sebi plan works out

Sebi is pushing for a plan that will let asset management companies offer hedge fund-like products to India's mom-and-pop investors with an aim to curb the rise of unauthorized schemes by offering regulated, high-risk options for everyday investors.

In a consultation paper, Sebi has outlined the creation of a “new asset class” that bridges the gap between traditional mutual funds and discretionary portfolio management services (PMS). 

This new asset class will feature sophisticated investment strategies, such as long-short strategies and inverse exchange-traded funds (ETFs), allowing asset managers to pool investments from retail investors.

So how does this work?

Investors can enter with a minimum of Rs 10 lakh, significantly lower than the Rs 50 lakh required for PMS and Rs 1 crore for alternative investment funds (AIFs). The minimum for mutual funds remains as low as Rs 500, with no upper limit. 

The regulator's discussion paper highlights that this new asset class aims to offer more flexibility, higher risk-taking capability, and larger ticket sizes, catering to a growing segment of investors, addressing a market gap that has driven some investors towards unregistered and unauthorized schemes.

This new asset class will operate under the mutual fund structure but with relaxed prudential norms. 

Investors will also have access to systematic plans like systematic investment plans (SIPs) and systematic withdrawal plans (SWPs). Sebi acknowledges that while these relaxations increase risks, they can be mitigated by setting higher minimum investment limits.

Additionally, the new asset class will allow investments in derivatives and derivative strategies, providing investors with professional management of these high-risk instruments. The move opens the door for innovative investment themes such as electric vehicles, water, recycling, and green energy, which can significantly benefit the mass affluent and high-net-worth individual (HNI) categories.

The redemption frequency for these investments will be tailored to manage liquidity effectively without imposing undue constraints on investors. The tax efficiency of this new product class, owing to its mutual fund structure, is another advantage. 

Existing AIFs and PMS, however, might find themselves at a disadvantage. Sebi proposes two routes AMCs to qualify for offering these new products: demonstrating a strong track record or meeting alternate criteria. 

A mutual fund must have been operational for at least three years, manage an average of Rs 10,000 crore in assets over the preceding three years, and have no recent regulatory actions against it.