SEBI Proposes New Asset Class to Bridge Mutual Funds and PMS Gap

 

In a move aimed at enhancing investment flexibility and curbing unauthorized investment avenues, the Securities and Exchange Board of India (SEBI) has proposed a new asset class that aims to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS-es). The regulatory proposal, outlined in a consultation paper released on July 16, seeks to introduce an asset class that allows investments in derivatives for purposes beyond hedging and rebalancing, offering investors higher risk-taking capabilities with a minimum investment threshold of Rs 10 lakh.

 The proposed asset class, to be offered by mutual fund houses or asset management companies (AMCs), is designed to cater to investors looking for regulated products with greater flexibility and risk tolerance than traditional mutual funds. The consultation paper emphasizes that these products will be categorized separately from conventional mutual fund offerings due to their risk profile, necessitating distinct branding to ensure clarity for investors.

 According to SEBI's consultation paper, "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 unauthorized investment products." This initiative underscores SEBI's efforts to channelize investments into regulated avenues while deterring retail investors from engaging with unregistered PMS providers.

 Key highlights of the proposed new asset class include:

 Minimum Investment Requirement: Each investor must allocate a minimum of INR 10 lakh across one or more investment strategies within the New Asset Class offered by an AMC/MF. This threshold is intended to attract investors with investible funds ranging from INR 10 lakh to INR 50 lakh, who currently seek alternatives in unauthorized PMS offerings.

 Regulatory Framework: The new asset class will operate under the existing regulatory framework applicable to mutual funds, ensuring that all permissible investments under MF regulations are available to this asset class.

Risk and Branding: Given the higher risk profile of these products compared to traditional MFs, SEBI proposes that they be clearly distinguished through separate branding to ensure transparency and investor awareness.

SEBI's proposal reflects a proactive approach to aligning investor interests with regulated investment products, offering a middle ground between the accessibility of mutual funds and the tailored approach of PMS-es. The consultation paper invites stakeholders to provide feedback and suggestions to refine the framework before its formal implementation, aiming to bolster investor protection and market integrity in India's financial ecosystem.