What is Mutual Fund lite? Here’s what we know about the launch of new asset class

The Securities and Exchange Board of India (Sebi) may introduce a new asset class for investors — Mutual Fund lite. The newest asset class is expected to bridge the gap between mutual funds (MFs) and portfolio management services (PMS). 

As per a report in Hindu Businessline, the Sebi board is expected to deliberate on the potential introduction of a new asset class featuring a minimum ticket size of Rs 10 lakh in its upcoming meeting on September 30. 

This proposed threshold aims to dissuade retail investors from participating in this investment opportunity, while simultaneously appealing to investors possessing investible funds within the range of Rs 10-50 lakh. 

SEBI hopes that the strategy will redirect these investors, who are currently being lured by unregistered portfolio management service providers, towards a regulated and transparent investment avenue.

SEBI is considering revising the shareholding norms for passive mutual funds to provide greater flexibility in their governance structure. This may involve revisiting the minimum net worth requirements for Asset Management Companies (AMCs) and reducing the lock-in period for sponsors’ shareholding. These potential changes aim to attract more reputable players to the market.

Sebi’s consultation paper

The capital markets regulator, in a consultation paper shared in July, had recommended a lenient framework with minimal regulatory constraints referred to as MF Lite Regulations for passive mutual fund schemes. The objective behind this initiative is to simplify the process for market entry, stimulate participation of new entities, lessen compliance burdens, enhance market reception, enable investment diversification, bolster market liquidity, and encourage innovation.

Within the documentation, the regulatory body proposed various mechanisms aimed at restricting speculative behaviors within the futures and options (F&O) domain.

With a minimum investment of Rs 10 lakh, individuals can explore a new asset class that presents a higher risk profile compared to traditional Mutual Funds (MFs). This opportunity targets higher-risk investors seeking regulated investment avenues without the significant minimum thresholds associated with Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), or the utilisation of unregulated structures. While the minimum investment threshold for Mutual Funds can be as low as Rs 100, Portfolio Management Services require a minimum of Rs 50 lakh.

Moreover, this new asset class provides the chance to delve into derivatives, restricting single stock investments to a maximum of 10% of the net assets. Nonetheless, this proposed investment option comes with its own set of challenges. It involves complexities that necessitate significant investor education to comprehend the potential risks and rewards associated with it.

“The proposed 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 unauthorized investment products,” the Sebi paper said.

Sebi had proposed

Sebi had proposed to introduce a novel asset class tailored for investors seeking to allocate funds ranging from Rs 10 lakh to Rs 50 lakh in diverse investment strategies, such as Long-short equity and Inverse Exchange Traded Funds, among others.

Under this proposal, investors can commit a minimum of Rs 10 lakhs to these products—a threshold below the Rs 50 lakh requirement for portfolio management services (PMS) and the Rs 1 crore stipulation for alternative investment funds (AIFs).

In contrast, mutual funds offer a minimum investment size as nominal as Rs 500 with no upper limit imposed.

Furthermore, investors will gain access to a myriad of systematic plans, encompassing Systematic Investment Plans (SIP), which empower them to participate in derivatives or derivative strategies to gain market exposure.

In order to distinguish this emergent asset class from conventional mutual funds and various investment products such as PMS, AIFs (Alternative Investment Funds), REITs (Real Estate Investment Trusts), and INVITs (Infrastructure Investment Trusts), a distinctive naming convention will be assigned.

SEBI’s consultation paper emphasized the necessity of controlling the spread of unregistered and illicit investment products.



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