Will SEBI’s ‘New Asset Class’ Proposal Be Worthwhile for You

July 18, 2024 Mutual Fund

The capital market regulator, vide a consultation paper dated July 16, 2024, has proposed the introduction of New Asset Class for investors.

The New Asset Class, according to the regulator, will be a new investment product that bridges the gap between mutual funds and Portfolio Management Services (PMS) in terms of flexibility in portfolio construction. It is aimed at bridging the gap between mutual funds and PMS.

[Read: PMS v/s Mutual Funds: Why the Latter is Better for Investors]

This proposed New Asset Class shall be suitable for investors with a high-risk taking capability and will have a higher ticket size of Rs 10 lakh.

The regulator is of the view that the New Asset Class would curb the proliferation of unregistered and unauthorized investment products, which often promise unrealistically high returns and exploit the investors’ expectations for better yields.

It is proposed that the New Asset Class be introduced under the Mutual Fund structure, with relaxations in prudential norms for such New Asset Class to be adequately effective.

Table: Relaxation to the Investment Restrictions

(Source: SEBI’s Consultation Paper on New Asset Class) 

So, this new regulated investment product (between mutual funds and PMS) will offer greater flexibility, higher risk, and therefore, a higher ticket size, plus liquidity.

All provisions of existing SEBI (Mutual Funds) Regulations, 1996, SEBI Master Circular for mutual funds and any other circular issued thereunder shall apply to the New Asset Class.

This proposal appears to be an extension of the written suggestion by SEBI to the Association of Mutual Funds in India (AMFI) in October 2023 to introduce a new ‘high-risk’ category of mutual funds.

In the consultation paper dated July 16, 2024, the regulator has stated all registered mutual funds fulfilling the below-mentioned criteria shall be eligible to launch the New Asset Class:

• Mutual Fund shall be in operation for a minimum of 3 years and have an average Asset 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.

The fund houses that do not fulfil the aforementioned criteria and the newly registered ones will also be allowed to launch a New Asset Class, subject to compliance with the following conditions:

• The AMC shall appoint…- A Chief Investment Officer (‘CIO’) for the New Asset Class with experience in fund management of at least 10 years and managing AUM of not less than 5,000 crore; AND- An additional Fund Manager for the New Asset Class with experience in fund management of at least 7 years and managing AUM of not less than 3,000 crore.
• 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.

Other than these norms the due process for registration and approval to launch a New Asset Class will be required to be followed by the trustee/sponsor of the mutual fund house, and on fulfilling of necessary requirements, the approval shall be provided. No investment strategy of the New Asset Class can be launched by the AMCs unless it is approved by the trustees, and subject to issuance of final observations on the offer documents by the regulator.

The New Asset Class, as per the regulator, shall represent a new arm/service offered under the broader umbrella of Mutual Funds as given in the illustration below:

(Source: SEBI’s Consultation Paper on New Asset Class) 

Whatever the investment strategy followed by the New Asset Class, it needs to be categorized by a risk-o-meter – similar to mutual funds.

However, to avoid any confusion amongst investors, the regulator has suggested the risk-o-meter for the New Asset Class has a different depiction and nomenclature than that of Mutual Fund schemes. It could be a ‘risk band’ and be depicted as under:

(Source: SEBI’s Consultation Paper on New Asset Class) 

Also, just as how traditional mutual funds disclose a monthly portfolio, the New Asset Class should also disclose the portfolio of all its investment strategies on the website of the AMC every month.

The consultation paper also proposed providing options such as Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) to the investors under the investment strategies followed by the New Asset Class.

Moreover, the units of the investment strategies may also be listed on the recognized stock exchanges, particularly for units of investment strategies with redemption frequency greater than a week.

However, at no point should the total invested amount of an investor fall below the minimum investment threshold of Rs 10 lakh due to actions of the investor such as withdrawals or systematic transactions etc. Nevertheless, the total amount may fall below Rs 10 lakh due to depletion in the value of underlying assets.

The regulator has stated that mutual fund houses need to make a clear distinction, as regards branding and advertisements, between the traditional mutual funds and the products under the New Asset Class.

This would ensure clarity for investors, plus aid in ensuring that any potential misconduct or failure in the performance of the New Asset Class does not result in brand contamination or negatively impact the confidence and trust in the traditional mutual funds.

At present, the SEBI consultation paper for the introduction of the New Asset Class/Product Category is available for public comments until August 6, 2024. The comments can be submitted on the link here-
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes

In my view, it is meaningful that the regulator is making a clear distinction between the traditional mutual funds (mainly meant for retail investors and HNIs) and the New Asset Class (targeted at HNIs and UNHIs), as regards the minimum investment required and risk categorisation.

That said, high-risk appetite investors with the means to invest in the New Asset Class, before deploying their hard-earned money should consider which investment strategy would be best suitable and not just chase returns.

[Read: How to Assess Your Risk Profile for Investments?]

It is vital to keep in mind that for every level of high returns you seek, there is risk. It is important to set your risk-return expectations right when you invest in any market-linked investment avenue.

“The essence of investment management is the management of risks, not the management of returns.” – Benjamin Graham (The father of value investing in his legendary book, The Intelligent Investor).

Thus, while you may want to take exposure to the New Asset Class be mindful of the risks too. Only going by the returns offered by any mutual fund scheme or other investment product is stupid; it may be detrimental to your health and wealth.

Be a thoughtful investor. A sensible approach with investment discipline shall pave the path to wealth creation and your long-term financial well-being.

Happy Investing!

This article first appeared on PersonalFN here