Capital markets regulator Securities and Exchange Board of India’s (Sebi’s) proposed new asset class, a hybrid between mutual funds (MFs) and portfolio management services (PMS), aims to fill the gap between MFs and PMS by offering greater flexibility, higher risk-taking capability, and a bigger ticket size.
The asset class, which Sebi had proposed in a consultation paper, will have a minimum ticket size of Rs 10 lakh.
In the consultation paper, Sebi had said, “[The 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 unauthorised investment products.”
All existing MFs that have been operating for three years and which manage an AUM of Rs 10,000 crore or more are eligible to launch this new asset class. Alternatively, fund houses having a CIO with 10 years of experience in managing an AUM of Rs 5,000 crore and an additional fund manager for the NAC with a minimum experience of seven years with an AUM of Rs 3,000 crore can also launch the NAC. Lastly, there shouldn’t be any complaints against the sponsor and the AMC for the past three years.
Long equity funds and inverse ETF funds can be launched by the AMCs in this new category.
This new asset class is proposed to be more flexible than mutual funds; the single issuer limit is 20% of NAV as opposed to 10% of NAV in MFs; investors can invest 12% of NAV in A and below-rated debt securities, whereas in MFs this limit is 6%, and 20% of NAV can be invested in REITs (10% of NAV in MFs).
Welcoming the proposal, Ajit Menon, CEO of PGIM MF, said this will open up new opportunities for the affluent with higher risk appetites and give them something more than just a plain vanilla MF. He also said, “We are seeing too much traction in the sectoral/thematic category in MFs, which is quite risky for retail investors as they just chase performance. With this new asset class, a lot of risky funds can be transferred to this new asset class, which can protect retail investors from excess risk.”
Madhu Nair, CEO of Union MF, believes the new asset class will have lucrative tax implications, similar to MFs, and will help create a more differentiated product.
Jimmy Patel, CEO of Quantum MF, is of the opinion that derivative exposure other than hedging and portfolio rebalancing will also provide more flexibility and higher returns for the investors. He said, “This product will interest the HNIs specifically as it will be a multi-asset product and give them more diversity.”
Daniel GM, Founder-Director, PMS Bazaar, thinks that this new asset class can cause migration of mutual fund investors to this new asset class and cause more competition among the AMCs to launch new NACs. He also said, “We have to wait and watch what differentiated value this new asset class adds to the investors as there are already existing structures in the industry.”