Sebi proposes 'New Asset Class' between mutual funds and PMS with Rs 10 lakh ticket size

Sebi has invited public comments on this latest by August 6, 2024.

In December, Sebi Chief Madhabi Puri Buch had hinted that the capital market regulator was working on creating a new asset class. "We feel there is room for an additional asset class somewhere between mutual funds and PMS... Sebi is looking into a whole new asset class," Buch had then said on the sidelines of a CII event.

The new asset class is expected to bridge a gap between mutual funds and PMS.

Currently, the range of investment products with varying risk-reward profiles are intended to meet the investment needs of retail, high net-worth and institutional investors. These products include mutual fund schemes, which are retail oriented with a low ticket size, portfolio management services with a ticket size of Rs 50 lakh and Alternative Investment Funds (AIFs) with a minimum investment value of Rs 1 crore.

"Over the years, a notable opportunity of a New Asset Class has emerged between Mutual Funds and PMS in terms of flexibility in portfolio construction," the consultation paper said.

The absence of such an investment product appears to have inadvertently propelled the investors of this segment towards unregistered and unauthorised investment schemes/entities, the consultation paper noted, adding that such schemes/entities often promise unrealistically high returns and exploit the investors’ expectations for better yields, leading to potential financial risks.

With the 'New Asset Class' in place, this would provide a regulated and structured investment suited to the investors in this segment, the consultation paper said.

Sebi in its consultation paper has mentioned the eligibility criteria for mutual funds AMCs to offer products under the New Asset Class and also sought feedback on not just the eligibility criteria but also if they were appropriate.

Eligibility Criteria

Route 1: Strong track record
All registered mutual funds should be in operation for a minimum of 3 years and have average assets under management (AUM) of not less than Rs 10,000 crore, in immediately preceding 3 years.
No action has been initiated or taken against the sponsor/AMC under section 11, 11B, and/or Section 24 of the SEBI Act, 1992 during the last 3 years.

Route 2: Alternate Route
AMC should appoint a Chief Investment Officer (CIO) for the New Asset Class with an experience of fund management of at least 10 years and managing AUM of not less than Rs 5,000 crore and an additional fund manager with experience of fund management of at least 7 years and managing AUM of not less than Rs 3,000 crore.

The mutual funds houses and AMCs will also have to position the product distinctly from the traditional mutual funds both from branding and advertisement perspectives.

Minimum investment threshold

The minimum amount for investment under the New Asset Class is proposed to be Rs 10 lakh per investor within the AMC/MF. This threshold will deter retail investors from investing in this product, while attracting investors, with investible funds between Rs 10 lakh and Rs 50 lakh, the consultation paper said.

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.

At no point in time should the total invested amount of an investor fall below Rs 10 lakh due to actions of the investor such as withdrawals or systematic transactions etc. However, the total amount may fall below Rs 10 lakh due to depletion of the value of investments.

Structure of the New Asset Class

1) Under the New Asset Class, the AMC can offer ‘Investment Strategies’ under pooled fund structure, akin to Mutual Funds schemes. This nomenclature is proposed in order to differentiate between the mutual fund schemes currently being managed by the AMCs and the schemes under the New Asset Class.

2) The redemption frequency of these ‘Investment Strategies’ can be tailored daily/ weekly/fortnightly/monthly/quarterly/annually/fixed maturity based on the nature of investments.

3) AMCs may implement appropriate notice or settlement periods for redemption from these funds to protect the interest of investors.

4.) The units of the investment strategies may also be listed on the recognised stock exchanges with redemption frequency greater than a week.

5) No Investment Strategy can be launched by the AMCs unless approved by the trustees and before the final observations by Sebi.

6) All provisions regarding the offer documents shall be on par with that of Mutual Fund schemes unless specified otherwise.

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