New asset class could bring in flexibility with higher ticket size

What is the new asset class that’s in the works?

To meet the growing demand for financial products in India, the Securities and Exchange Board of India (Sebi) has proposed to introduce differentiated investment solutions with higher average ticket size than mutual funds but lower than PMS and AIFs.

Who can invest?

The minimum investment amount in them would be ₹10 lakh. The beginning point in mutual funds is ₹500, in PMS it is ₹50 lakh, and ₹1 crore in AIF. This is intended to cater to the well-to-do investors who can invest between ₹10 lakh and ₹50 lakh.

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How will their product offerings be different?

The regulator has not yet come out with the final norms but it gave a couple of examples of differentiated investment strategies in its discussion paper. These are Long-short Equity and Inverse Exchange Traded Funds. Industry officials said a wide variety of products-equity-oriented, debt-oriented or hybrid products could be launched in this category. New age niche themes based on water, electric vehicles, green energy, etc could be launched. Similarly, on the fixed-income side, high-risk credit strategies could be launched.

What was the need for this asset class?

Sebi recognised that as the Indian financial markets grew in size, there was a growing appetite for investment products with greater flexibility, higher risk-taking capability and a higher ticket size, which the mutual fund industry, by design, could not provide. The absence of such investment products, according to the regulator, appears to have inadvertently propelled several investors towards unregistered and unauthorised investment schemes. This is a way of bringing them back into the regulatory ambit.

What will be the advantages of such investment products?

Most importantly, they will be regulated by Sebi. The regulator would endeavour to make them as investor-friendly as possible, similar to mutual funds. Investors may also have an option of systematic plans such as Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) for investment strategies under the New Asset Class. On the tax front, the new investment product will be efficient as it comes under an MF structure.

Who can offer this new asset class?

All mutual funds shall be allowed to offer this new asset class. Mutual Fund needs to be in operation for a minimum of 3 years and have an average Asset Under Management of not less than ₹10,000 crore, in the immediately preceding three years and no regulatory action has been taken against the sponsor or fund house for last three years. Funds that do not fulfill the criteria can launch this product after appointing a chief investment officer with experience in fund management of at least 10 years and managing AUM of not less than ₹5,000 crore, and an additional fund manager with experience in fund management of at least 7 years and managing AUM of not less than ₹3,000 crore.

What will be the expense ratio of such products? How easy will be redemptions?

Sebi has not discussed the expense ratio structures – the annual fee that mutual funds charge investors – yet, but industry officials think they could be higher than what mutual funds charge. Unlike mutual funds, the redemption conditions also could be more restrictive based on the nature of investments.

What does the introduction of these products mean for PMS and AIFs?

These products will compete with PMS and AIFs, which will now have to up their game. Wealth managers believe these new products will draw new investors, who are hesitant to invest ₹50 lakh or ₹1 crore in a PMS or AIF but are willing to try out smaller amounts of ₹10 lakh each across investment products. Smaller standalone PMS and AIFs could be squeezed.