The consultation paper from the market regulator, released on July 16, suggests a minimum investment of Rs 10 lakh for this type of asset.
The market regulator suggested a new type of asset class that could close the gap between Mutual Funds and Portfolio Management Services (PMS-es) in terms of flexibility in building portfolios. A suggestion has been made to permit the asset class to invest in derivatives for reasons other than hedging and rebalancing.
In a consultation paper issued on July 16, the Securities and Exchange Board of India (Sebi) has suggested that a minimum investment of Rs 10 lakh be required for this asset class, that mutual fund houses or asset management companies provide these products, that they will have higher risk compared to traditional MFs and should be marketed differently, and that all investment options allowed for MFs be applicable to this new asset class.
The consultation paper explained that the New Asset Class aims to offer investors a regulated investment option with increased risk and larger investment amounts to reduce the prevalence of unregistered and unauthorized products.
The regulator has stated that they have set a minimum investment to prevent individuals from turning to unregistered PMSes.
The minimum investment required for investing in the New Asset Class is INR 10 lakh per investor within the AMC/MF, as stated in the consultation paper. This requires an investor to put at least INR 10 lakh into one or multiple investment strategies within the New Asset Class provided by an AMC/MF. This limit will prevent small investors from investing in the product, but will appeal to investors with funds ranging from INR 10 lakh to INR 50 lakh who are currently being lured by unauthorized portfolio management services.
Engaging in derivative investments.
The consultation paper suggested that investing in derivatives could be used to gain market exposure, rather than simply hedging or rebalancing the portfolio. However, it has proposed circumstances in which this may be accomplished.
The total exposure across all investable instruments, such as derivatives and other permitted instruments, should not surpass 100% of the investment strategy’s net assets as allowed by SEBI.
The combined exposure from trading derivative instruments must not surpass half of the net assets in an investment portfolio.
It was also mentioned that the 50 percent cap does not have to apply to index funds or ETFs introduced in the new asset category, based on indices determined by the market regulator.
The exposure to a single stock through derivatives in an investment strategy should not exceed 10 percent of the net assets.
“This marks a substantial progression for India’s investment network,” stated Sandeep Jethwani, co-founder of Dezerv. This presents a great chance for India’s creators of wealth.
Jethwani stated that this allows investors with higher-risk profiles to participate in regulated opportunities without the minimum thresholds required by PMS and AIFs, thus motivating asset managers to develop creative investment options and prompting wealth managers to expand their knowledge.
