Sebi’s ‘new asset class’: Here’s all you need to know

Capital markets regulator Securities and Exchange Board of India (Sebi), in its quest to fill the gap between mutual funds (MFs) and portfolio management services (PMS), has put out a consultation paper aimed at creating a new asset class.

With a minimum investment of Rs 10 lakh, this new asset class will carry more risk than traditional MFs. It may give higher-risk investors access to regulated opportunities without the high minimum thresholds of PMS and Alternative Investment Funds (AIFs) or without using unregulated structures. While the minimum investment amount for MFs is as low as Rs 100, for PMS it is Rs 50 lakh.

It also offers exposure to derivatives, where single stock investments will be limited to 10% of the net assets. But the proposed new asset class has a set of challenges. Such investment options can be complex and may require substantial investor education to grasp the risks and benefits. Liquidity is another issue, as there could be difficulties in entering or exiting positions smoothly during the initial stages, experts say.

“The proposed MF-PMS hybrid scheme offers investors a wider array of investment options, potential for higher returns through flexible portfolio management, and increased accessibility to professional investment advice. However, it might introduce complexities, higher fees, and liquidity concerns,” says Sonam Srivastava, Founder, CEO, and Fund Manager at Wright Research & Capital, a Sebi-registered robo advisory firm.

Investment strategies also include products like inverse exchange-traded funds (ETFs), which will allow investors to bet on market declines. While this could open unique avenues for wealth creators looking for more sophisticated investment solutions, it also raises questions about how prepared Indian investors are for such complex strategies.

“Indian investors have shown increasing sophistication and appetite for diverse financial products, but readiness varies across different segments. While retail participation in the stock market has grown, the understanding of complex products like inverse ETFs is still limited. There is a need for extensive investor education and awareness campaigns to help retail investors understand the risks and mechanics of such products,” says Anirudh Garg, Partner and Fund Manager at Invasset, a PMS firm.

PMS firms are traditionally restricted from taking direct exposure in Futures and Options (F&O) due to regulatory constraints.

However, PMS managers say the introduction of a new asset class could offer alternative ways to achieve similar investment objectives. It can help PMS firms by incorporating the new asset class into their strategic asset allocation models to enhance diversification and improve risk-adjusted returns.

“The ability to offer F&O exposure through the new MF-PMS hybrid asset class presents a significant opportunity to enhance investment flexibility and potentially generate higher returns. Given the current restrictions on F&O exposure for PMS, this new avenue could provide a much-needed outlet for asset managers seeking to implement more dynamic investment strategies. We really hope that PMS managers are also given the same flexibility in F&O exposure as the new asset class,” says Srivastava.

Garg says the new asset class might provide indirect exposure to market movements, serving as a proxy for F&O strategies. This could enable PMS firms to implement hedging and tactical strategies without directly participating in the F&O market.

“If the new asset class includes instruments designed for risk management (like inverse ETFs or structured products), PMS firms can use these to mitigate downside risks, enhancing portfolio stability. It’s crucial for PMS providers to ensure their use of the new asset class adheres to regulatory guidelines and maintains high standards of compliance and governance,” says Garg.

While the new asset class proposed by Sebi presents exciting opportunities, it demands careful consideration of the associated risks and the preparedness of different investor segments.

@teena_kaushal