In a consultation paper dated July 16th 2024, SEBI has proposed the introduction of a “New Asset Class” (for now, that would be its name) with a “risk-return profile
between MFs and PMS.” Public comments can be sent via this link until Aug 6th 2024.
The paper says, “The proposed New Asset Class seeks to provide investors with
a regulated investment product featuring higher risk-taking capabilities and a higher
ticket size (minimum ten lakhs), aimed at curbing the proliferation of unregistered and unauthorized investment products”.
SEBI believes this new asset class will “attract investors, with investible funds between INR 10 lacs – INR 50 lacs (minimum ticket size for PMS), who are today drawn to unauthorized and unregistered portfolio management service providers.”
Two investment “strategies” have been approved, and comments are being sought for more ideas.
- “Long-short Equity Fund ” aims to deliver returns by taking long and
short positions in equity and equity-related instruments. For example, the fund may be bullish on the automobile sector and bearish on the IT sector and invest in both these sectors by going long on the automobile sector and short on the IT sector.” - “Inverse ETF/Fund: A fund that seeks to generate returns negatively
correlated to the underlying index returns.”
Restrictions:
- “The New Asset Class shall be able to take exposure in derivatives for
purposes other than hedging and portfolio rebalancing.” - The ‘Investment Strategies’ shall not borrow for the purpose of investments except to meet temporary liquidity needs of the New Asset Class for repurchase, redemption of units or payment of interest or dividend to the unitholders, as currently applicable in the case of Mutual Funds.
Relaxations compared to mutual funds
- New asset-class products can invest 20% of Nav in a single security (10% for MFs)
- Credit risk exposure from single bond issuer: AAA – 20% of NAV, AA – 16% of NAV, A & below – 12% of NAV. The limits are half of these for MFs
- Ownership of paid-up capital carrying voting rights: 15% (10% for MFs)
- Percentage of NAV in equity and equity-related instruments of any company: 15% (10% for MFs)
- Derivatives: direct exposure allowed (in MFs, it is only for hedging and rebalancing)
- Sector level limits: 25% in a particular sector (20% for MFs)
- Investment in REITs & InvITs: No scheme shall invest more than 20% of NAV in units of REITs and INVITs, with not more than 10% of its NAV in units of REIT and INVIT issued by a single issuer. Limits are half of these for MFs.
Is this a new asset class? That is debatable. It is a new product class. I see “new asset class” as a product differentiator than an actual new asset class.
Will the new asset class be useful? It will undoubtedly be helpful for product manufacturers and those in the media who can write about something new. It will be useful to advisors who charge a net worth-based fee.
Will it be useful to investors? Again debatable. Most investors do not appreciate simple concepts like asset allocation and diversification. So, they are unlikely to use this “new asset class” well. It would more likely be a new form of portfolio clutter.
Is this new asset class necessary for investors? It is eminently unnecessary.
How can the new products be used? Inverse ETFs help investors take short positions on the index without borrowing or selling the underlying securities. These products can be used to construct a tail risk hedge. A tail risk is an extreme market event resulting in a considerable loss. Exposure to an inverse ETF can lower such a loss because it contains derivatives designed to gain when the market falls.
A Long-Short Equity Fund can generate equity-like returns with lower volatility if the fund manager calls work out. The spread between long and short equity positions results in a net long exposure to equity markets.
Naturally, such products come with significantly higher risks and higher costs. When most fund managers “actively” managing more straightforward MF portfolios cannot beat the index, I shudder to think how the performance of such products requiring even more active management would be.
Most investors cannot quantify the overall benefit of these products on their portfolios. They will be enjoyed by those who take piece-meal pleasure in investing. Yes, some investors will use and benefit from these products smartly, but exceptions do not provide good examples.
A simple portfolio with the proper asset allocation schedule and periodic rebalancing is all that is required to achieve our financial goals with minimal risks and fees.
These complex products are for investors with shiny object syndrome and the fear of missing out. A pairing of such investors with the financial services industry is a match made in heaven (from the industry’s perspective).
The more the regulator complicates our choices, the more we should strive to keep it simple. It is very hard to do for those addicted to social media.
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