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Context

• The Securities and Exchange Board of India (SEBI) has proposed the introduction of a new asset class designed to fill the gap between mutual funds (MFs) and Portfolio Management Services (PMS).
• This initiative aims to offer investment products with characteristics that bridge the gap between these two existing categories, catering to investors seeking a balance of risk and flexibility.

READ ALL ABOUT MUTUAL FUNDS: https://www.iasgyan.in/daily-current-affairs/mutual-fund#:~:text=The%20funds%20collected%20from%20investors,known%20as%20the%20expense%20ratio.

READ ALL ABOUT PORTFOLIO MANAGEMENT SERVICES: https://www.iasgyan.in/daily-current-affairs/foreign-portfolio-investment-26

What is SEBI’s New Asset Class?

• The proposed new asset class will operate under the mutual fund structure and is set to require a minimum investment of Rs 10 lakh.
• This asset class is designed to offer a risk-return profile that lies between traditional MFs and PMS.
• The goal is to serve investors who have a higher risk tolerance and invest larger amounts than those typically involved in MFs but prefer lower investment thresholds compared to PMS.
• According to SEBI, this new asset class will provide greater flexibility and higher risk-taking potential than traditional MFs while avoiding the high minimum investment amounts required by PMS.
• This aims to address a market gap and meet the needs of a growing segment of investors.

What Are the Ticket Sizes of MF and PMS Investments?

• Currently, portfolio management services (PMS) require a minimum investment of Rs 50 lakh, targeting high net-worth individuals (HNIs) with customized investment solutions across various asset classes.
• In contrast, mutual funds (MFs) have a much lower entry point, with a minimum investment of just Rs 100, and involve a pooled investment managed by professional fund managers.
• The significant difference in investment thresholds highlights the distinct target audiences of these two categories.

What is the Objective of the Proposed Investment Product?

• The new asset class is intended to address the investment gap that exists between mutual funds and portfolio management services.
• By offering a regulated product with a higher investment threshold and increased flexibility, SEBI aims to provide a viable alternative to unauthorized and unregistered investment schemes that have attracted investors seeking higher returns. This move is expected to curb the proliferation of such schemes and offer a structured, regulated investment option.

How Will Investments in the New Asset Class Work?

• Investments in this new asset class will be structured under the mutual fund framework but will include relaxed prudential norms to accommodate its unique risk profile.
• The minimum investment amount for this category is proposed to be Rs 10 lakh, which will serve to deter retail investors while attracting those with investible funds between Rs 10 lakh and Rs 50 lakh.
• This approach is designed to draw investors away from unregistered PMS providers and offer a more secure investment environment.
• Like traditional MFs, the new asset class will provide options such as Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs). These features will allow investors to manage their investments with greater ease and flexibility.

Who Will Benefit from the New Asset Class and How?

• The new asset class is expected to benefit investors who are looking for regulated, higher-risk investment opportunities without the high minimum thresholds of PMS and Alternative Investment Funds (AIFs).
• This structured and regulated product is designed to offer protection and potentially higher returns through flexible investment strategies, providing an attractive alternative to unregulated investment schemes.

Potential Investment Strategies

• Long-Short Equity Fund: This strategy involves taking both long and short positions in equity and equity-related instruments. For example, the fund might be bullish on one sector while bearish on another, investing accordingly to capitalize on these market trends.
• Inverse ETF/Fund: This fund aims to generate returns that are negatively correlated with the returns of an underlying index, providing potential gains during market declines.

• Additionally, the new asset class will allow exposure to derivatives for purposes beyond hedging and portfolio rebalancing, enhancing the flexibility and risk-taking capabilities of investors, and potentially leading to higher returns.

READ ABOUT ETF: https://www.iasgyan.in/daily-current-affairs/exchange-traded-fund#:~:text=An%20ETF%2C%20or%20exchange%2Dtraded,based%20on%20supply%20and%20demand.

READ ABOUT ALTERNATIVE INVESTMENT FUNDS: https://www.iasgyan.in/daily-current-affairs/rbi-tightens-norms-for-lenders-investing-in-aifs#:~:text=Alternative%20Investment%20Funds%20(AIFs)%20in,to%20take%20on%20higher%20risks.

READ ABOUT SIPs: https://economictimes.indiatimes.com/wealth/invest/4-different-types-of-systematic-investment-plan-sip/what-is-a-trigger-sip/slideshow/111117135.cms

DERIVATIVES: https://www.iasgyan.in/daily-current-affairs/currency-derivatives

READ ALL ABOUT SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi

PRACTICE QUESTION Q. Discuss the role of mutual funds in the Indian financial market. How do mutual funds contribute to financial inclusion and investor protection? Evaluate the challenges faced by mutual funds in India and suggest measures to enhance their effectiveness and reach.

SOURCE: THE INDIAN EXPRESS