Rounaq Neroy
July 17, 2024 / Reading time: approx. 7 min.
Listen to Will SEBI’s Proposal for a ‘New Asset Class’ Be Worth It for You?
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The New Asset Class will be a new investment product that bridges the gap between mutual funds and Portfolio Management Services (PMS) in terms of flexibility in portfolio construction, according to the regulator. It is aimed at bridging the gap between mutual funds and PMS.
(Read: PMS vs Mutual Funds: Why the latter is better for investors)
This proposed new asset class is suitable for investors with high risk appetite and has a higher ticket size of Rs 10 lakh.
The regulator believes the new asset class would curb the proliferation of unregistered and unauthorised investment products, which often promise unrealistically high returns and play on investors’ expectations of higher returns.
It is proposed to introduce the new asset class within the investment fund structure, with relaxations in prudential standards to ensure that this new asset class is sufficiently effective.
Table: Relaxation of investment restrictions
This new regulated investment product (between investment funds and PMS) therefore offers more flexibility, higher risk and therefore a higher ticket size, plus liquidity.
All the provisions of the existing SEBI (Mutual Funds) Regulations, 1996, SEBI Master Circular for mutual funds and all other circulars issued thereunder shall be applicable to the new asset class.
This proposal appears to be an extension of SEBI’s written proposal to the Association of Mutual Funds in India (AMFI) in October 2023 to introduce a new category of ‘high-risk’ mutual funds.
In the consultation document of 16 July 2024, the regulator stated that all registered investment funds that meet the criteria mentioned below are eligible for the launch of the new asset class:
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The mutual fund must have been in operation for at least 3 years and have an average assets under management (AUM) of not less than Rs 10,000 crore in the immediately preceding 3 years.
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No action has been initiated against the Sponsor/AMC under Section 11, 11B and/or Section 24 of the SEBI Act, 1992 during the last 3 years.
The fund houses that do not meet the above criteria and the newly registered funds are also allowed to launch a new asset class, provided that the following conditions are met:
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The AMC appoints…
– A Chief Investment Officer (‘CIO’) for the new asset class with a minimum of 10 years of experience in fund management and a minimum of Rs 5,000 crore in assets under management; AND
– An additional fund manager for the new asset class with a minimum of 7 years of experience in fund management and a minimum of Rs 3,000 crore in assets under management.
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No action has been initiated against the Sponsor/AMC under Section 11, 11B and/or Section 24 of the SEBI Act, 1992 during the last 3 years.
Apart from these norms, the proper process for registration and approval to launch a new asset class has to be followed by the trustee/sponsor of the mutual fund house and upon fulfilling the requisite requirements, the approval will be granted. No investment strategy of the new asset class can be launched by the AMCs unless approved by the trustees, and subject to issuance of final comments on the offering documents by the regulator.
The new asset class, according to the regulator, represents a new branch/service offered under the broader umbrella of investment funds, as shown in the illustration below:
Whatever investment strategy the new asset class adopts, it must be categorized using a risk meter, similar to mutual funds.
However, to avoid confusion among investors, the regulator has proposed that the risk-o-meter for the new asset class have a different presentation and nomenclature than that of mutual funds. It could be called a ‘risk band’ and be depicted as follows:
Just as traditional mutual funds disclose their portfolios monthly, the new asset class would also have to disclose the portfolio of all its investment strategies on the AMC website on a monthly basis.
The consultation document also proposed offering investors options such as the Systematic Investment Plan (SIP), the Systematic Withdrawal Plan (SWP) and the Systematic Transfer Plan (STP) among the investment strategies followed by the New Asset Class.
In addition, the units of the investment strategies may also be listed on the recognised stock exchanges, in particular for units of the investment strategies with a redemption frequency of more than one week.
However, the total invested amount of an investor should not fall below the minimum investment threshold of Rs 10 lakh at any point of time due to any actions of the investor like withdrawals or systematic transactions etc. However, the total amount may fall below Rs 10 lakh due to depreciation in the value of the underlying assets.
The regulator has indicated that investment fund houses must make a clear distinction between traditional investment funds and the products that fall under the new asset class in terms of branding and advertising.
This would provide clarity for investors and also help prevent potential misconduct or underperformance of the new asset class from leading to brand contamination or negatively impacting confidence in traditional mutual funds.
Currently, the SEBI consultation paper for the introduction of the new asset class/product category is available for public comments till August 6, 2024. The comments can be submitted via the link here:
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes
In my view, it is significant that the regulator makes a clear distinction between traditional investment funds (mainly aimed at retail investors and high net worth individuals) and the new asset class (aimed at high net worth individuals and high net worth individuals), in terms of the required minimum investment and risk categorisation.
That said, investors with a high risk profile and the means to invest in the new asset class should consider which investment strategy is most appropriate before committing their hard-earned money and not just look for returns.
(Read: How do you assess your investment risk profile?)
It is vital to remember that for every level of high returns you seek, there is risk. It is important to set your risk-return expectations appropriately when investing in a market-related investment opportunity.
“The essence of asset management is managing risk, not managing returns.” – Benjamin Graham (the father of value investing in his legendary book, The Intelligent Investor).
So, while you may want to gain exposure to the new asset class, you also need to consider the risks. Relying solely on the returns offered by a mutual fund or other investment product is foolish; it can be harmful to your health and wealth.
Be a thoughtful investor. A wise approach with investment discipline will pave the way to wealth creation and your long-term financial well-being.
Have fun investing!
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ROUNAQ NEROY is head of content activities at PersonalFN and editor-in-chief of PersonalFN’s newsletter, The Daily Wealth Letter.
As co-editor of premium services namely Investment Ideas Note, Multi-Asset Corner Report and Retire Rich Report; Rounaq brings forth possibly the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He is also the author and voice of PersonalFN’s e-learning course — which is aimed at helping investors become their own financial planners. Additionally, he is an active contributor to several issues of Money Simplified, PersonalFN’s e-guides in the effort and passion to educate investors.
He is a graduate in Commerce (M. Com), holds an MBA in Finance and a Gold Medalist in the Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq has over 18 years of experience in the financial services industry.
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