Sebi proposes new asset class with higher risk-taking capabilities; should you invest?
If you are keen to explore more high-risk, high-return avenues in a patrolled environment, Sebi has something fresh cooking for you. The regulator has proposed a ‘new asset class’ for investors with higher risktaking capabilities. This new investment vehicle seeks to bridge the gap between mass-market mutual funds and portfolio management services (PMS) catering to the well-heeled. Is this new recipe for you?What does it offer?
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This new asset class, yet to be named formally, will be introduced under the mutual fund structure. This means it will be a pooled savings vehicle, run by a mutual fund company and supervised by a trustee. It will have a minimum investment size of Rs.10 lakh, unlike traditional mutual funds which can be bought for as low as Rs.500. With a ticket size lower than the Rs.50 lakh threshold for PMS offerings, this new product is positioned at the intersection of mutual funds and PMS.
It will offer differentiated investment strategies with varying risk-return profiles that are currently not available to many. Some proposed strategies include ‘long-short equity funds’ and ‘inverse exchange-traded funds’. Sebi’s hope is that the product will stop investors chasing offerings that operate outside the regulatory ambit. The investors who have a bigger outlay but cannot afford the higher ticket size PMS offerings are often drawn to such avenues. Tarun Birani, Founder, TBNG Capital Advisors, asserts, “The fear of missing out and desire for quick money lead many investors to unregulated entities and products where accidents can happen. This new structure will ensure money flows towards better products within the regulatory ambit.” Sandeep Jethwani, Cofounder, Dezerv, remarks, “Investors with higher risk profiles can now access regulated opportunities without the high mini minimum thresholds of PMS and AIF, or resorting to unregulated structures, which bodes really well for the protection of wealth that India creates.”
The proposed new asset class will be run with more relaxed operating guidelines compared to mutual funds. The products will be allowed to invest up to 20% of the fund NAV in a single debt security and up to 15% in a single company’s shares, compared to 10% each in case of a mutual fund. Sector-level limits for debt securities have been increased to 25% from 20%. Permissible credit risk exposure to a single bond issuer for various credit ratings has been doubled (AAA: 20% of NAV; AA: 16% of NAV; A & below: 12% of NAV). The exposure limits to REITs and INVITs has also been doubled to 20% on aggregate, and 10% for a single issuer. Apart from this, these strategies will be permitted to take exposure to derivatives for purposes other than hedging and portfolio rebalancing. In terms of taxation, the new asset class will be similar to mutual funds, wherein investors do not incur any tax till they sell these.
Upping the risk quotient
It is clear that the new strategies will offer higher risk, mostly involving a play on derivatives. This will allow investors to take bets on any market scenario, not just the rising market. A long-short equity fund, for instance, will place bets on both the upside and downside in equity markets, unlike the traditional long-only equity funds. Inverse ETFs will allow investors to bet on the downside in the index without borrowing or selling the underlying stocks. If executed well, this opens up a huge potential for generating returns. Rohit Shah, Principal Officer, GYR Financial Planners, insists this avenue need not be a playground only for big investors. “Retail investors forming a part of the upper middle class can explore this avenue as it sits midway between mutual funds and PMS,” he says.
However, many are not convinced about the merits of these strategies. It will tempt investors who crave newer, differentiated products and seek adventure in investments, even as experts insist that investing should be kept boring and simple. “This avenue will diminish the simplicity that is the USP of mutual funds,” asserts Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors. Even if you can afford the `10 lakh outlay, the underlying strategies may not suit your risk appetite. Existing mutual fund offerings are well equipped to meet most people’s financial goals, say experts. Birani concedes that most investors can do without such exotic flavours in their portfolios. It’s more suited to savvy investors with an understanding of these products. “Mis-selling is a potential risk. They must be sold strictly with investors’ risk tolerance in mind,” he warns. It is also likely that these will come at a higher cost than traditional mutual funds. It remains to be seen if the performance justifies the higher cost. Existing offerings are often unable to do so consistently.
New asset class will push up risk exposure
It will allow investors to take bets on any market scenario, not just the rising market.
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This story originally appeared on: India Times - Author:Faqs of Insurances
