Explained: Sebi's new asset class and how it can benefit HNI investors

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Market regulator Sebi has approved the creation of a new asset class that will bridge the gap between mutual funds (MFs) and portfolio management services (PMS). This new product aims to offer investors a wider range of investment options and cater to diverse needs.

Key Features of the New Asset Class:

• Flexibility: The new asset class will provide investors with greater flexibility in portfolio construction compared to traditional mutual funds.
• Minimum Investment: The minimum investment amount will be Rs. 10 lakh, making it accessible to a broader range of investors than PMS, which typically requires a much higher investment.
• Structured Approach: While offering flexibility, the new asset class will still have a structured approach, providing investors with some of the benefits of mutual funds.

• Regulatory Oversight: SEBI will regulate this new asset class, ensuring investor protection and transparency.
• Clear Distinction: The term "Investment Strategies" will be used to distinguish this new asset class from traditional mutual fund schemes.

Addressing the Investment Gap:

Currently, the investment landscape offers three main options:

• Mutual Funds: Require a minimum investment of Rs 500.
• Portfolio Management Services (PMS): Require a minimum investment of Rs. 50 lakh.
• Alternative Investments: Require a minimum investment of Rs. 1 crore.

The new asset class will fill the void between mutual funds and PMS, providing investors with a viable option for investments between Rs. 10 lakh and Rs. 50 lakh.

"The introduction of the New Asset Class (NAC) by SEBI is a highly commendable move. It provides an excellent opportunity for high-net-worth individuals (HNIs) with high-risk appetites to capitalize on strategies such as long-short and inverse exchange-traded funds, which can significantly enhance their portfolios," said Rahul Jain, President & Head, Nuvama Wealth.

 Currently, these strategies are unavailable through traditional mutual funds. Importantly, these strategies will be managed by professionals in accordance with regulations set by the regulator. 

"The NAC will benefit investors by eliminating the need to use unregulated and unauthorized products to access these strategies," added Jain. 

Is it a riskier proposition? 

"The products seem riskier but only marginally so, and does not offer a profit-share for the managers, and also may have to be specified by the regulator in detail before they can be offered," said  Deepak Shenoy, Founder and CEO at Capitalmind.

Sebi said the  new asset class will have to have minimum investment amount of 1 million rupees. "This was in the consultation paper but it applies as an overall investment in all such new-asset-class schemes put together. So on a per-scheme basis, the amount may be lower," added Shenoy.

Safeguards:

• No Leverage: To mitigate risks, the new asset class will not allow for leverage.
• Restricted Investments: Investments in unlisted and unrated instruments will be limited to the same restrictions applicable to mutual funds.
• Derivatives Exposure: Derivatives exposure will be capped at 25% of the Asset Under Management (AUM) for non-hedging and rebalancing purposes.

Addressing Unregulated Schemes:

The new asset class aims to curb the proliferation of unregistered and unauthorized investment schemes that often promise unrealistic returns and exploit investors. By providing a regulated and transparent alternative, Sebi hopes to reduce the appeal of such schemes.