The Securities and Exchange Board of India (SEBI) has recently proposed a new investment category aimed at creating a middle ground between traditional mutual funds and Portfolio Management Services (PMS). This new category is designed to cater to investors with investable funds ranging from Rs 10 lakh to Rs 50 lakh, who might otherwise consider unregulated portfolio management services.
The proposed investment category targets investors with a higher risk tolerance and introduces a range of options including Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP). These options are designed to offer structured approaches and flexibility in managing investments.
One significant feature of the new category is the use of derivatives. The proposal allows derivatives not only for hedging and rebalancing but also for broader market exposure. However, several conditions are imposed to manage this exposure prudently. The total gross exposure across all permissible investments, including derivatives, must not exceed 100% of the net assets allocated to any investment strategy. Additionally, exposure to derivatives traded on exchanges is capped at 50% of the strategy’s net assets, though this restriction does not apply to index funds or ETFs based on SEBI-approved indices. Furthermore, exposure to derivatives of a single stock is limited to a maximum of 10% of the net assets of the investment strategy.
Investments under this new category must not fall below Rs 10 lakh due to the investor’s own actions, such as withdrawals. However, the value can fall below this threshold if it is due to a decrease in the investment's value. The asset class will only permit investment strategies specified by SEBI, including long-short equity funds, inverse ETFs, and various derivatives strategies.
Taxation for this new category will follow mutual fund-like rules, meaning taxes are incurred only upon the sale of the investment. This aligns with the familiar tax treatment of mutual funds and aims to provide a regulated and transparent investment product for those ready for higher-risk opportunities.
The mutual fund industry has responded positively to this proposal. Radhika Gupta from Edelweiss Mutual Fund views the new asset class as a valuable development, integrating innovative and higher-risk investment options into the familiar mutual fund framework. She appreciates the regulated nature of the new category, which combines transparency with innovation.
However, potential risks have been noted. Samir Arora of Helios Capital Management has expressed concerns about the structure of inverse ETFs, pointing out their high-risk nature and potential for significant losses unless the market moves constantly in one direction or they are held briefly. He suggests a more gradual introduction of inverse ETFs, potentially starting at the Alternative Investment Fund (AIF) level before being included in lower investment thresholds.
There is also a call for clarity on whether SEBI-registered investment advisors or research analysts will be allowed to recommend these new strategies to their clients. Kunal Valia believes that enabling these professionals to offer such strategies could benefit the overall market and support the growth of the new asset class.
SEBI is currently seeking feedback on this proposal until August 6, as it evaluates the potential impact and viability of the new investment category. This initiative represents SEBI's efforts to provide a regulated, higher-risk investment option that bridges the gap between mutual funds and PMS, catering to investors seeking more sophisticated strategies within a structured and regulated environment.
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