Why SEBI Wants a New Asset Class for High Risk Investors and How Will it Work

The Securities and Exchange Board of India (SEBI) on Tuesday released a consultation paper on the introduction of the ‘New Asset Class’. The move aims to create a new product to bridge the gap between mutual funds (MFs) and Portfolio Management Services (PMS), targeting investors with investible funds ranging from Rs 10 lakh to Rs 50 lakh.

The markets regulator highlighted that the new asset class sought to provide investors with a regulated investment product featuring higher risk-taking capabilities and higher ticket size. It aims to control the proliferation of unregistered and unauthorized investment products.

SEBI’s Objective to Create a New Asset Class

According to the consultation paper, SEBI aims to curb the proliferation of unregistered and unauthorized investment products. The minimum investment amount for investment under the New Asset Class shall be Rs 10 lakh per investor at the level of the New Asset Class within the AMC/MF. This means an investor must invest a minimum of Rs 10 lakh, across one or more investment strategies, under the New Asset Class offered by an AMC/MF.

By setting a minimum investment threshold of Rs 10 lakh, SEBI aims to deter retail investors while attracting those currently drawn by unauthorized PMS providers.

“This threshold shall deter retail investors from investing in this product, while attracting investors, with investible funds between Rs 10 lakhs to Rs 50 lakhs, who are today being drawn to unauthorized and unregistered portfolio management service providers,” the regulator said.

Eligibility Criteria for New Asset Class

According to SEBI’s proposal, all fund houses with an average asset under management of Rs 10,000 crore over the last three years and without any major regulatory sanctions could launch such products.

Mutual Funds not meeting this criterion can also launch the new asset class if they fulfill certain requirements, including appointing a Chief Investment  Officer (CIO) with a minimum of 10 years of experience managing an AUM of Rs 5,000 crore and an additional fund manager with at least seven years of experience managing AUM of Rs 3,000 crore.

“The registration process for New Asset Class shall be a two-stage process, consisting of in-principle and final approvals, similar to the registration process currently followed for Mutual Funds,” as per SEBI paper.

Permissible Investments

According to SEBI, all investments permissible to MFs under the SEBI (Mutual Funds) Regulations, 1996 shall be available for the New Asset Class.

Additionally, the consultation paper said that investing in derivatives may be done as a way to take exposure in the market, and not just to hedge or rebalance the portfolio.

“This will provide more flexibility and risk-taking in investments and potentially generate higher returns,” the regulator said. But it has suggested certain conditions under which this can be done.

Firstly, the cumulative gross exposure through all investable instruments including derivatives and any other instruments as may be permitted by SEBI from time to time should not exceed 100 per cent of the net assets of the the investment strategy.

Second, the total exposure through exchange-traded derivate instruments should not exceed 50 per cent of the net assets of an investment strategy. It added that the 50 per cent limit need not apply to index funds or ETFs launched under the new asset class, on indices specified by the market regulator.

Third, the total exposure through derivates of a single stock should not exceed 10 per cent of the net assets of an investment strategy.

Here’s what the experts say

Reacting to the development, Deepak Shenoy, Founder and CEO, Capitalmind said: “Interesting new proposal by SEBI for slightly high net worth investors, allowing mutual funds to create a concept called "Investment Strategies" that can

1) Use futures and options for positions (rather than only for hedging/balancing)

2) Using more complex or innovative strategies like inverse funds which benefit from the market falling

3) Invest more than 10 per cent per stock (15 per cent) and have looser limits for credit concentration in debt and is limited to investors putting Rs 10 lakh overall across all investment strategies (so you can have Rs 5 lakh each in two such strategies by the same fund house)

Sonam Srivastava, Founder and Fund Manager at Wright Research says while this proposal could revolutionize customised investments, it faces a crucial caveat: the need to broaden eligibility.

“Restricting eligibility to AMCs could limit the talent pool of available managers. SEBI should consider opening it to PMS providers and other qualified investment professionals to unlock its full potential. This broader eligibility would bring diverse expertise, attract more investors seeking customized strategies, and enhance competitiveness, leading to better performance and lower costs,” she said.

“I hope PMS managers will eventually be allowed this asset class, because it's tax efficient, but it's currently only proposed for mutual fund AMCs to separately apply,” Shenoy added.

According to Shenoy, 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). It will promote the concept of domestic MF participation in F&O, which is needed as an institutional balance to FII participation.

He added that this will deepen the market in the longer term, allowing domestic mutual funds to provide appropriate position cover in the F&O market, in credit risk, and aggressive long-short strategies, by taking capital from more well-heeled investors (Rs 10 lakh minimum) which reduces the chance of small retail losing out to the higher risk.

Srivastava says the regulator aims to curb unauthorized investments by offering similar customization within a secure framework, expanding investment options to suit various risk profiles and financial goals.