Market regulator, Securities & Exchange Board of India (SEBI), proposed a new investment product category that could bridge the perceived gap between mutual funds and portfolio management services (PMS). In its consultation paper, SEBI suggested a minimum investment of Rs10 lakh for the new asset class, which could be permitted to invest in derivatives for purposes beyond just hedging and rebalancing.
Currently, one can invest as low as Rs100 in a mutual fund but to invest in PMS, a minimum investment of Rs50 lakh is mandated, while alternative investment funds (AIFs) have a minimum investment value of Rs1 crore.
The new proposed asset class with a Rs10 lakh minimum investment across strategies will be offered only by mutual funds. These products will be riskier than what is traditionally provided by MFs and, therefore, will be branded differently. The new asset class will provide a regulated product featuring greater flexibility, higher risk-taking capability, and a higher ticket size to meet the needs of the emerging category of investors, SEBI says.
According to the consultation paper, the proposed new asset class aims to curb the proliferation of unregistered and unauthorised investment products.
SEBI’s assumption is that investors with investible funds between Rs10 lakh and Rs50 lakh, are today being drawn to unauthorised and unregistered portfolio management service-providers.
Not only will all investments permissible to MFs be available to this new asset class, but SEBI has also proposed that shorting of stocks would be allowed which is now allowed for only AIFs. Shorting refers to the strategy of borrowing stocks for a fee an investor does not own and selling them with the objective of making gains from the price decline. Subsequently, the investor buys the stock at a lower price and delivers it to the lender. Shorting is not a popular practice in India because a system of lending and borrowing has not developed.
Apart from shorting, SEBI has even suggested allowing inverse exchange-traded funds (ETFs). ETFs are constructed to profit from a decline in the value of an underlying benchmark. They allow investors to make money when the underlying index falls, but without having to short-sell any assets.
SEBI has also proposed that the new asset class be allowed to invest even in derivatives for purposes other than hedging and rebalancing. This is not allowed for even in PMS today.
The paper has proposed that the cumulative gross exposure through all investable instruments, including derivatives and any other instruments as SEBI may permit from time to time, should not exceed 100% of the net assets of the investment strategy. Also, the total exposure through exchange-traded derivative instruments should not exceed 50% of the net assets of an investment strategy. The total exposure through derivatives of a single stock should not exceed 10%t of the net assets of an investment strategy. SEBI has asked for online comments to be submitted through this
link by 6th August.
In my view, shorting should be allowed for the retailers too albeit in a gradual way.