'New asset class will be more tax efficient compared to Category III AIFs': Experts weigh in Sebi's new proposal

The new asset class proposed by the Securities and Exchange Board of India (Sebi) is anticipated to introduce innovative investment products and styles into the market. This development may potentially incentivize certain investors to transition away from current high-risk products such as portfolio management services (PMS) and alternative investment funds (AIFs).

This move aims to offer regulated, higher-risk investment opportunities while curbing unauthorised schemes, according to SEBI's consultation paper. The new investment asset will be offered under the mutual fund (MF) structure, with new branding and relevant relaxations in existing MF norms.

The Sebi has proposed:

> Sebi has proposed to introduce a new asset class for investors, who want to put between Rs 10 lakh and Rs 50 lakh in differentiated investment strategies such as Long-short equity and Inverse Exchange Traded Funds, among others.

> Investors can invest a minimum of Rs 10 lakhs in such products, below the threshold of Rs 50 lakh for portfolio management service (PMS) and Rs 1 crore for alternative investment funds (AIFs).

> The minimum investment size of mutual funds is as low as Rs 500 and there is no upper limit.

> Investors will have various systematic plans available to them, including Systematic Investment Plans (SIP), allowing them to invest in derivatives or derivative strategies for market exposure.

> In order to differentiate this new asset class from traditional mutual funds and other investment products like PMS, AIFs (Alternative Investment Funds), REITs (Real Estate Investment Trusts), and INVITs (Infrastructure Investment Trusts), it will be given a unique nomenclature.

> SEBI’s consultation paper highlighted the need to curb the proliferation of unregistered and unauthorized investment products.

New asset class vs PMS vs AIF

Experts have been sharing their views about the new asset class and how can it affect investors.

Value Research in its blog said: "The proposed asset class offers several relaxations in portfolio construction. These include a higher single issuer limit for debt securities (20 per cent of assets, up from 10 per cent), increased credit risk-based single issuer limits for various credit ratings, and a higher limit for ownership of paid-up capital carrying voting rights (15 per cent, up from 10 per cent). The new class also allows for greater investment in the equity of any company (15 per cent, up from 10 per cent) and doubles the limits for investments in REITs and InvITs. Sector-level limits for debt securities are increased to 25 per cent from 20 per cent."

1. PMS and AIF currently have minimal disclosure requirements.

However, the new product is proposed to function under strict regulatory standards, including monthly portfolio disclosures and publicly accessible foundational documents akin to mutual funds.

Experts feel the heightened level of transparency is anticipated to entice investors towards this new option over traditional PMS structures, empowering them to make well-informed investment choices.

2. Compared to a Rs 50 lakh investment in one PMS, the same amount can now be diversified across five new asset class products, allowing for risk spreading.

3. Tax efficiency presents itself as a significant consideration that may attract High Net Worth Individuals (HNIs) and Ultra High Net Worth Individuals (UHNIs) towards this novel investment opportunity. As the market eagerly anticipates further details regarding tax regulations, it is projected that the taxation of this emerging asset class will align with the underlying assets.

“It can be assumed that investments in the new asset class will be taxed at par with the existing MF structure, i.e, with pass-through status. In that case, the new asset class will be more tax efficient compared to Category III AIFs, which do not yet enjoy pass-through status,” said Rahul Jain, president and head, Nuvama Wealth.

Deepak Shenoy, Founder and CEO at Capitalmind, said: “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 Rs 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."

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."

3. Domestic MF participation in F&O

In his post on LinkedIn, Shenoy added that 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.

Feroze Azeez, deputy CEO of Anand Rathi Wealth, also said: “Looking at the F&O frenzy, this move can help participants with high risk-taking capability to participate in the derivatives market with professional expertise. New asset class participation in the derivatives will also promote institutional balance to FII participation in the F&O market.”