SEBI Proposes New Investment to Bridge MFs and PMS Gap

Margesh Rai

22 Jul, 2024

SEBI has developed a new type of investment category to facilitate investors with funds between Rs 10 lakh and Rs 50 lakh. This strategy aims to combine mutual funds and Portfolio Management Services (PMS). This strategy is intended to offer a controlled product that allows for more flexibility, increased risk tolerance, and larger investment sizes to meet the needs of a new group of investors.

SEBI’s Goal Behind Introducing a New Asset Class

SEBI’s consultation paper emphasized the importance of controlling the spread of unregistered and unauthorized investment products. By implementing a minimum investment threshold of Rs 10 lakh, SEBI aims to discourage retail investors and attract those interested in unauthorized PMS providers. This newly introduced asset category, suggested within the mutual fund (MF) framework, will include prudential regulations adjustments to improve efficiency.

Key Highlights of the New Asset Class

There are certain key features of the new asset class, which include:

Greater Flexibility

Investors will enjoy greater autonomy in managing their investment approach than conventional mutual funds.

Higher Risk-taking Capability

The new class is designed for investors willing to accept increased risk to potentially achieve higher returns.

Systematic Investment Options

Investors can invest using structured schemes such as SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan).

Pooled Fund Structure

Just like mutual funds, the new classification will combine investments from numerous people.

Redemption Frequency

Different choices for redeeming will be based on the underlying assets, enabling improved management of liquid assets.

Investment Strategy

Long-short equity funds and inverse ETFs are among the potential strategies to consider.

Updated Eligibility Requirements Revealed

To be eligible for the new asset class, mutual funds must have been in operation for a minimum of three years with an average Asset Under Management (AUM) of at least Rs 10,000 crore in the previous three years, and the sponsor or AMC must not have faced any regulatory actions in the past three years.

Mutual funds that do not meet these standards can still introduce the new type of investment as long as they meet certain conditions, like hiring a Chief Investment Officer (CIO) with a minimum of 10 years of experience handling Rs 5,000 crore in assets under management (AUM) and another fund manager with at least seven years of experience managing Rs 3,000 crore in AUM.

What is the Way to Register a New Asset Class?

The registration of a new asset class will involve two steps—initial and ultimate authorizations—just like the existing mutual fund registration procedure. Since the new asset class will function within the broader mutual fund scope, sponsors do not have to uphold a distinct net worth or infrastructure for it.

Expert Opinion Related to the New Asset Class

The expert says that this course provides greater flexibility and potentially increased risk-reward possibilities compared to mutual funds. Even though this proposal can potentially transform personalized investments, it encounters a critical requirement: the necessity to expand qualification criteria. Limiting eligibility to Asset Management Companies (AMCs) may restrict the pool of talented managers available. SEBI should consider allowing PMS providers and other qualified investment professionals to access it to maximize its possibilities.

Moreover, SEBI’s ultimate goal is to limit unauthorized investments by providing customization within a protected structure, broadening investment choices to accommodate different risk profiles and financial objectives. The proposal is open for public comments until August 6, 2024.

Conclusion

SEBI’s latest investment plan intends to close the divide between Mutual Funds (MFs) and Portfolio Management Services (PMS), providing a well-rounded option for investors looking for versatility, personalization, and increased profits. This program aims to promote creativity, address changing investor needs, and promote wider involvement in the financial markets. The key to its success will depend on how well it is implemented, the clarity of guidelines, and the involvement of stakeholders.