Is Sebi’s new asset class a game-changer for Indian investors?

If you’ve been investing in India for a while, you’re probably familiar with the most common choices: mutual funds, fixed deposits, or if you have a lot more money, Portfolio Management Services (PMS). But what if you’re stuck somewhere in between—wanting more sophisticated options than mutual funds but not quite ready to jump into the deep waters of PMS? This is exactly where SEBI’s new asset class comes in.

The Securities and Exchange Board of India (SEBI) has recently introduced a new investment category to bridge this gap, targeting investors who have ₹10 lakhs to ₹50 lakhs to spare. But what’s the buzz really about? Is it worth your time and money? Let’s dig into what this new asset class offers and whether it could be the right fit for you.

The missing middle in Indian investing

For years, investing in India has been a tale of two extremes. On one end, you have mutual funds, accessible to almost everyone—you can start with as little as ₹500 a month. On the other, you have options like PMS and Alternative Investment Funds (AIFs) that cater to the wealthy, typically requiring a minimum of ₹50 lakhs or even ₹1 crore. So what about those who fall in the middle? People like Durga, a retired banker who’s looking to invest ₹10 lakhs for her grandchildren’s college expenses.For investors like Durga, mutual funds might feel a bit too vanilla. They want something more advanced—strategies that promise a little more upside or some protection when markets get rough. But the high entry barriers of PMS and AIFs make them out of reach.SEBI’s new asset class is trying to change that. It’s designed for investors who want to explore advanced strategies but don’t have crores to put on the table. Think of it as the Goldilocks zone of investments—something that’s “just right.”

What makes this new asset class different?

Unlike regular mutual funds, which are categorised based on the type of stocks (large-cap, mid-cap, etc.), this new class is all about the strategy. This means fund managers can use complex tactics like long-short equity or inverse ETFs—stuff that’s typically used by the big players. Let’s break down a couple of these strategies:

Long-short equity funds

Imagine a fund that can bet on both winning and losing horses. If the fund manager thinks that, say, IT stocks are going to go up, they’ll “go long” by buying those stocks. But if they think banking stocks will fall, they’ll “short” those stocks—meaning they’re betting on their decline. This way, the fund can make money whether the market is going up or down.

Inverse ETFs

These are pretty much the opposite of your typical mutual funds. Instead of aiming to grow when the market rises, they are designed to profit when the market falls. So if you have a bearish outlook or want to hedge against a downturn, an inverse ETF might be a good fit.

These strategies, until now, were mostly available in AIFs, which usually require a hefty ₹1 crore minimum investment. SEBI’s new asset class lowers the bar, allowing people with ₹10-50 lakhs to dip their toes into this world.

Why is Sebi doing this now?

You might wonder why SEBI is introducing this asset class now. Well, this isn’t a new concept globally. Similar strategies have been around in Europe and the US for over a decade, especially after the 2008 financial crisis. In Europe, they have something called “liquid alternatives”—strategies that act like hedge funds but are packaged like mutual funds. These were created to offer everyday investors some of the perks that HNIs enjoy, like hedging against volatility or capturing gains from market drops.

But here’s the catch—these “liquid alternatives” haven’t always performed well. Studies show that in the 2010s, these funds averaged less than 2% returns annually. They were safe, but not exactly wealth generators. That’s because these strategies require skillful management, and even the best managers sometimes struggle to beat the basic stock and bond markets. Yet, SEBI is pushing this because Indian investors are becoming more sophisticated and are looking for something beyond the basics.

The upsides:

  1. More options for serious investors: This new category is perfect for people who want more from their investments but aren’t ready for PMS-level commitments. It’s for those who have more than the bare minimum but not enough to go all out.
  2. Risk-adjusted returns: Strategies like long-short equity can help balance risk better than traditional mutual funds. They can hedge against market downturns, making them attractive during uncertain times.

  3. Better liquidity and flexibility: Many of these funds offer flexible withdrawal options—daily, monthly, or annually. Some might even be listed on stock exchanges, making it easier to buy and sell units.

  4. Lower entry barrier: Unlike AIFs, which require a massive ₹1 crore minimum investment, these funds target the ₹10-50 lakh segment, making them much more accessible.

The Downsides:

  1. Higher costs: These funds will likely come with higher expense ratios because of active management. That means more of your money goes into fees compared to a simple index fund.
  2. Complexity: Understanding these strategies isn’t easy. It’s not as straightforward as “buying low and selling high.” You need to be comfortable with terms like “going short” and “hedging.”
  3. Performance uncertainty: Globally, similar strategies have struggled to outperform basic stock and bond markets. This could be the case here too, especially in a market like India’s where active management already faces a tough challenge.

Should you consider Sebi’s new asset class?

It depends on where you stand as an investor. If you’re like Durga, sitting on ₹10-50 lakhs and wanting more than what a regular mutual fund offers, this could be worth exploring. But you need to do your homework. Don’t just chase returns—look at the fund manager’s track record, understand the strategies, and consider the costs.

Remember, these strategies work well in theory, but the execution is what makes or breaks them. So while SEBI’s new asset class is a promising addition to the Indian investment landscape, it’s not a silver bullet. It’s just one more option to consider in your quest for better returns.

Final thoughts

At the end of the day, SEBI’s new asset class is a welcome move for serious investors looking to go beyond traditional options. It offers more choices, some much-needed flexibility, and a chance to explore advanced strategies without diving into the deep end. But just like any other investment, it comes with its own set of risks and caveats. So, approach it with caution, do your research, and always keep your investment goals in mind.

(The author Chakravarthy V. is Cofounder and Executive Director, Prime Wealth Finserv.)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)



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