There are investment vehicles, also known as managed portfolios, like Mutual Funds (MFs), Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).

Fund managers float new investment products within the guidelines framed by the Securities Exchange Board of India (SEBI). Product innovation is desirable as it enables a wider basket for investors; at the same time, SEBI’s guardrails are required for risk management and investor protection.

SEBI has proposed an investment product, tentatively known as new asset class or investment strategy. As and when it becomes operational, mutual fund houses will come out with new products under this framework. Here, we look at the profile of this new product or asset class.

Need for new product

As per design, MFs are meant for retail investors. Though HNIs also invest in MFs, the minimum ticket size for investment is kept low at ₹500. Portfolio Management Schemes are meant for HNIs with a minimum investment size of ₹50 lakh. AIFs require a commitment of ₹1 crore.

That leaves a wide space between MFs and PMSs. There are investors who can afford a higher ticket size than required for MF but cannot afford ₹50 lakh. The other perspective is SEBI has defined limited risk levels for MF portfolios and relatively liberal norms for PMSs.

In the space in between the two, there is space for portfolios with relatively higher risk than MFs but conservative compared with PMSs.

At the SEBI board meeting held on September 30, it was mentioned “the new product also aims to curtail the proliferation of unregistered and unauthorised investment schemes/entities, which often promise unrealistic high returns and exploit investors’ expectations for better yields, leading to potential financial risks.”

To explain, there are ‘fund managers’ who are not registered with SEBI but can offer services informally. However, strictly or ethically speaking, this is not desirable, at least from the regulator’s view point. At minimum ticket size of ₹10 lakh, the new product / asset class opens up the space for regulated products with portfolio risks higher than MFs.

Proposed product

At the SEBI board meeting, it was mentioned “the new product aims to provide investors with a professionally managed and well-regulated product that offers greater flexibility, higher risk-taking capabilities for higher ticket size, while ensuring that appropriate safeguards and risk mitigation measures are in place.”

Existing MFs will offer new products under the new framework. Those will be different from existing MF products.

The investor will have the flexibility to build a minimum ticket size of ₹10 lakh across the AMC.

Product profile

On July 16, SEBI floated a consultation paper, outlining the proposed details of the products. It says, only ‘investment strategies’ specified by SEBI can be launched under the new asset class. Some of the investment strategies that may be permitted are:

*Long-short equity fund: A fund that seeks to deliver returns by taking long and short positions in equity and equity-related instruments.

*Inverse ETF/Fund: A fund that seeks to generate returns that are negatively correlated to the returns of the underlying index.

For the clarity of readers, conventional MF products are only long, wherein a fund manager buys stocks in the cash or spot segment of the equity market and stays invested. Short position means taking a position in the derivatives segment of the equity market i.e. options and futures.In conventional MFs, only in a few fund categories it is allowed to take short positions. That apart, fund managers cant take short positions per se to benefit from prices moving down.

In the new asset class, the fund manager will have the flexibility to play out both the views - benefit when stock prices move up (long positions) as well as when stock prices move down (short positions).

Other flexibilities include a higher single issuer limit for debt securities is 20% instead of 10% in conventional MFs products. The exposure cap for equity and equity-related instruments of any firm is 15% rather than 10%. The single issuer limit for debt securities that are AAA-rated is 20% instead of 10%.

Conclusion

When SEBI comes out with the final operational circular, the product will be launched. Investors with the requisite size i.e. ₹10 lakh for one AMC, will have a SEBI-regulated product option with a relatively higher risk-return profile.

(Joydeep Sen is a corporate trainer on financial markets, and an author)