SEBI’s Proposed New Asset Class for Mutual Funds

Source-This post on Sebi’s Proposed New Asset Class for Mutual Funds has been created based on the article “Filling a gap” published in “Business Standards” on 26 July 2024.

UPSC Syllabus-GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– The Securities and Exchange Board of India (Sebi) has proposed a new asset class for mutual fund investors to bridge the gap between portfolio management schemes (PMS) and traditional mutual funds.

What are the Key Features of the Proposed Asset Class?

1) Investment Threshold- The proposed minimum investment is ₹10 lakh, placing it between regular mutual funds and PMS, which requires a ₹50 lakh minimum.

2) Fund Management Requirements-

A) AMCs must appoint chief investment officers with at least 10 years of experience managing assets worth ₹5,000 crore or more.

B) Additional fund managers should have at least seven years of experience handling ₹3,000 crore or more.

C) The AMC itself must have been operational for at least three years with assets of ₹10,000 crore or more.

3)  Investment Options and Flexibility-

A) These funds will offer systematic investment plans (SIPs), systematic withdrawal plans, and systematic transfer plans, similar to traditional mutual funds.

B) Fund managers will have the flexibility to use derivative strategies for purposes beyond hedging.

4) Branding and Investor Awareness -The new asset class will have a unique branding to stand out from low-risk mutual funds and ensure investor clarity.

5) Redemption and Liquidity-

A) More flexibility in tailoring redemption frequency to manage liquidity constraints.

B) Proposal to list units on stock exchanges, like exchange-traded funds (ETFs), for easier entry and exit.

6) Investment Strategies- This new class of funds will use “Long-Short” portfolios to benefit from both rising and falling share prices and may create “Inverse ETFs” that move opposite to a benchmark ETF.

Read More- Changes made by India’s Securities and Exchange Board (SEBI) for NRIs and OCIs

What is the significance of Proposed New Asset Class for Mutual Fund?

1) Meeting Investor Needs-It caters to investors with higher risk appetites and financial capacities by offering them regulated access to high-risk, high-return strategies.

2) Combating Unauthorized Schemes- It will minimize the attraction of unregistered and unauthorized entities that promise unrealistic returns by establishing a regulated environment.

3) Investor Protection– It offers a modicum of protection to investors who might otherwise be drawn to unregulated schemes.

4) Market Gap Fulfillment– It offers a regulated choice for investors looking for higher-risk strategies, filling a market gap.

Conclusion-Sebi’s proposed new asset class for mutual funds represents a significant development in India’s financial markets. However, if this new asset class becomes popular, Sebi and the exchanges will have to manage increased derivatives volumes and improve surveillance and margin systems.

Question for practice

What are the main characteristics of the proposed asset class, and why is it important for mutual funds?