SEBI Proposes a New Asset Class between Mutual Funds and PMS: Beneficial or Risker?

On Tuesday, July 16th, 2024, The Securities and Exchange Board of India (SEBI) proposed a new asset class with a minimum ticket size of ₹10 lakh. This move aims to provide investors with more options to diversify their portfolios. However, it also raises questions about its impact on investors, particularly regarding accessibility and potential returns. Let’s understand the details to determine whether this proposal is a blessing or a curse for investors.

Understanding the New Asset Class Proposal

The new asset class is introduced to offer investment opportunities with a minimum ticket size of ₹10 lakh. This proposal lies between the accessible mutual fund products with entry points as low as ₹100 and the high-end PMS products and alternative investment funds (AIFs) requiring minimum investments of ₹50 lahks and ₹1 crore, respectively. 

This new asset class will be managed by mutual funds, ensuring a structured and regulated investment environment. To ensure high standards and expertise, SEBI mandates that the asset management company (AMC) offering this product must have been operational for at least three years and have an average AUM of ₹10,000 crore over the preceding three years. The AMC can also qualify if it appoints a CIO with over ten years of fund management experience and has handled an AUM of at least ₹5,000 crores.

Additionally, the fund manager for this asset class must have at least seven years of experience managing funds and overseeing an AUM of not less than ₹3,000 crores. These criteria aim to safeguard investor interests and maintain high management standards.

Potential Benefits for Investors

1. Diversification Opportunities

This new asset class allows investors to diversify their portfolios in different ways. This option helps spread risk across various investments, potentially leading to more stable and higher returns.

2. Access to High-Growth Sectors

Investors may gain exposure to previously inaccessible high-growth sectors. These include emerging industries, innovative startups, and niche markets with potential returns.

3. Enhanced Portfolio Performance

Investors can increase their portfolio performance by investing in a new asset class. Including alternative investments can provide a boundry against market volatility and improve the overall risk-return profile of the portfolio.

Potential Drawbacks for Investors

1. High Entry Barrier

The minimum ticket size of ₹10 lakh may be a significant barrier for small investors. This restricts access to the new asset class to a limited group of high-net-worth individuals (HNIs) and institutional investors, potentially widening the gap between different investor segments.

2. Increased Risk Exposure

New and alternative asset classes risk more than traditional investments like stocks and bonds. Investors must know the potential for higher volatility and the possibility of losses, especially in uncharted or less regulated markets.

3. Limited Liquidity

Investments in certain asset classes, such as private equity or real estate, tend to have lower liquidity. This means investors need help quickly liquidating their investments if they need immediate access to funds.

Conclusion

The new asset class presents opportunities and challenges for investors. While it offers diversification and access to high-growth sectors, the high entry barrier and increased risk exposure may deter smaller investors.

This proposal could bless high-net-worth individuals and institutional investors by providing new opportunities to enhance their portfolios. However, it might feel more like a curse for retail investors with limited capital, excluding them from potential high-return investments.

Ultimately, the impact of asset class will depend on how investors navigate the associated risks and opportunities.