Want higher returns but don't have millions? Sebi proposes new option

This new product category aims to fill the gap between traditional mutual funds and portfolio management services (PMS) or alternative investment funds (AIFs).

The securities regulator, Sebi, is proposing a new investment option for those willing to take on more risk in exchange for potentially higher returns. This new category aims to bridge the gap between traditional mutual funds and exclusive services like portfolio management.

Why is Sebi proposing this?

Limited choices: Currently, there's a limited selection for investors. Mutual funds offer lower minimum investments but also lower risk profiles. Portfolio management services (PMS) and alternative investment funds (AIFs) cater to high net-worth individuals with higher minimum investments and higher risk tolerance.

Unregulated investments: Sebi believes this gap has led some investors to fall prey to unregulated investment schemes promising unrealistic returns. This new option would be a regulated product.

Key features of the new options:

Minimum Investment: It will require a minimum investment of Rs. 10 lakh. This is significantly lower than the minimums for similar high-risk  nvestment options like Portfolio Management Services (PMS) which typically start at Rs 50 lakh. The goal is to deter small, retail investors who might not be comfortable with the higher risk involved. Instead, they aim to attract investors who have some money to invest (between Rs 10 lakh and Rs. 50 lakh) but are currently looking at unregulated investment options that might be even riskier.

Risk Profile: Higher risk compared to mutual funds, offering potentially higher returns. nvestment Strategies: More flexibility in investment strategies, including using derivatives for purposes beyond just hedging. This will be a regulated product, unlike some unauthorized investment schemes.

Investing with Derivatives:

Unlike regular mutual funds, this new option will allow using derivatives for more than just hedging other investments. This could potentially lead to higher returns but also carries more risk.

Sebi has proposed some rules to limit this risk:

• Total Exposure: The total value of all investments including derivatives cannot exceed the total net assets of the investment strategy (basically, they can't borrow money to invest more).
• Exchange Traded Derivatives Limit: Up to 50% of the investment strategy's assets can be in exchange-traded derivatives (a type of derivative contract). There's an exception for index funds that track a specific market index.
• Single Stock Derivatives Limit: Investments in derivatives based on a single stock cannot exceed 10% of the investment strategy's assets. This prevents putting all your eggs in one basket.

“The proposed new 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 unauthorised investment products,” Sebi has said in a discussion paper. “Over the years, a notable opportunity of a new asset class has emerged between MFs and PMS in terms of flexibility in portfolio construction,”  the Sebi paper said. 

The key difference between the proposed new investment option and traditional mutual funds (MFs):

Riskier Strategies: Unlike MFs - MFs typically focus on minimizing risk, but this new option will allow for riskier investment strategies.

“It is proposed to have a distinct nomenclature for the new asset class to distinguish it from traditional MFs and other investment products already available in the securities market such as PMS, AIFs, REITs and InvITs,” Sebi has said.

“India is finally opening up to different investment products, styles and approaches. Passive, factor, inverse exchange traded funds, alternatives, and more. There is no single way to invest,” Radhika Gupta, managing director and chief executive officer, Edelweiss AMC, wrote on X. “AMC businesses of the future will build multiple centres of expertise on a platform rather than a single style or individual driven business,” Gupta added.

Who can offer this?

Existing asset management companies (AMCs) with a good track record and sufficient assets under management (AUM) will be eligible to offer this new product. They will also need to appoint experienced fund managers to handle it.

Minimum requirements for AMCs:

• At least 3 years of experience managing funds.
• Managing a minimum of Rs 10,000 crore in assets (Assets Under Management or AUM).

OR

New Companies (subject to meeting certain criteria): Sebi may allow new companies to offer this option, but the specific criteria haven't been finalized yet.

Experienced Fund Managers Required:

Chief Investment Officer (CIO): Every company offering this option needs a highly experienced CIO with:

• At least 10 years of experience managing funds.
• A proven track record of managing at least Rs. 5,000 crore in assets.
• Additional Fund Manager: In addition to the CIO, a separate experienced fund manager will be required specifically for this new, riskier asset class. They need to have:
• At least 7 years of experience managing funds.
• A proven track record of managing at least Rs. 3,000 crore in assets.

Why these requirements?

Sebi wants to ensure that only experienced companies and fund managers can offer this riskier investment option. 

What's next?

Sebi is currently seeking public comments on this proposal until August 6. 

How does it benefit investors? 

"SEBI's consultation paper for introducing new product classes with higher investment minimums than Mutual Funds and more freedom to invest can help investors gain access to a newer set of strategies like Long short equities, inverse ETFs, etc.  which can help them express specific views on the market. A higher investment minimum ensures smaller retail investors don’t invest into these  strategies with potentially higher risk as well as it allows asset managers flexibility in determining liquidity windows for these products, while continuing to be under the strong regulatory framework," said Kaustubh Belapurkar, Director – Fund Research at Morningstar Investment Research India Private Limited.