With a bull market on, new investors are keen on products that can deliver returns in double-quick time. Seasoned investors, having made money on stocks or mutual funds across market cycles, are now ready for products that offer a higher-risk high-reward proposition. Today, the regulated options available for such investors are subject to a high ticket-size.
Portfolio Management Schemes (PMS) call for a minimum investment of ₹50 lakh and the entry bar for Alternative Investment Funds (AIFs) starts at ₹1 crore. Investors who do have investible surpluses of ₹50 lakh or ₹1 crore may be loath to hand over their entire portfolio to a single manager.
Editorial. SEBI’s idea for riskier product above MFs needs fleshing out
The Securities and Exchange Board of India (SEBI) has now floated a consultation paper proposing a new product category that will sit between mutual funds and PMS, targeted at such investors.
What is it?
The new product, consisting of many ‘strategies’, will be offered under a separate vertical by mutual fund houses. The minimum investment per strategy will be ₹10 lakh. Investments will be allowed through systematic investment plans (SIPs) too, subject to the investor starting with a minimum lumpsum amount of ₹10 lakh.
How will it be different from a PMS or AIF?
The minimum investment for the product will be ₹10 lakh, against ₹50 lakh for PMS and ₹1 crore for AIFs. Each strategy under this category will pool the contributions of many investors and invest the money in a single portfolio. A NAV will be calculated and declared for this portfolio. There will be no customised individual portfolios, like those offered by PMS. Today, MFs and AIFs pay no tax on their own transactions because they are treated as pass-through vehicles for tax purposes. On PMS transactions, investors assume the tax incidence. Whether the new pooled vehicle will get a pass-through status for taxation purposes, will be decided by the CBDT.
Who will offer this product?
All existing asset management companies (AMCs) with a three-year track record who have managed at least ₹10,000 crore in assets for the last three years can offer it, with SEBI’s go-ahead. The AMC should also not have any regulatory action initiated against it for the previous three years. AMCs who don’t meet the first two criteria of three-year record and ₹10,000 crore assets can still offer it, provided they hire a Chief Investment Officer with minimum 10 years’ experience managing ₹5,000 crore of assets and a fund manager with minimum seven years of experience managing ₹3,000 crore to oversee this vertical.
What are the strategies likely to be offered?
Subject to SEBI’s approval, AMCs are free to offer strategies that invest in a combination of stocks, bonds, mutual funds, REITs, InvITs and all other securities available to mutual funds. In addition, they can also invest in futures and options for non-hedging purposes. SEBI has specifically mentioned that strategies such as long-short and inverse ETFs (ETFs based on indices, which gain when markets fall) will be permitted. In addition, SEBI plans to allow these products to take more concentrated exposures to individual stocks and bonds than permitted in mutual funds.
What are the conditions for derivative exposures?
The gross exposure taken by these products cannot exceed 100 per cent of their net assets. Therefore, these products will not be allowed to leverage investor funds to buy securities. But a strategy can take exposure to derivatives to the extent of 50 per cent of its assets. As this 50 per cent will be calculated based on the options premium and purchase price for futures contracts, the leverage inherent to these instruments is allowed. Exposure to a single stock option or futures contract cannot exceed 10 per cent of the strategy’s net assets.
Will the product be open-ended or closed-ended?
SEBI plans to give the option to the AMC to offer strategies with different redemption frequencies — whether daily, weekly, monthly, quarterly, or fixed maturity. Therefore, both open-end and closed-end strategies are likely.
How will it be regulated?
SEBI will be the regulator for these products. The consultation paper makes it clear that all the provisions of its Mutual Fund Regulations 1996 and the circulars issued under it, will apply to the new product category, unless specifically exempted. Offer documents for the new strategies will be cleared by SEBI, same as is the case with mutual funds.
When is the product likely to be launched?
SEBI has set August 6, 2024, as the last date for feedback on its consultation paper. It may float its final regulations after processing this feedback and drafting the final set of regulations, after discussions with stakeholders.