Sebi Proposes New Asset Class to Bridge Mutual Funds and PMS Gap

On Tuesday, market regulator Sebi proposed the creation of a new asset class to fill the gap between mutual funds and portfolio management services (PMS), targeting investors with investible funds between ₹10 lakh and ₹50 lakh.

This new asset class aims to offer a regulated product with greater flexibility, higher risk-taking potential, and a larger ticket size to cater to this emerging investor segment.

Sebi suggested a minimum investment amount of ₹10 lakh per investor to ensure retail investors are deterred while attracting those with investible funds within the specified range, who might otherwise turn to unauthorized PMS providers.

The proposed asset class seeks to curb the spread of unregistered investment products and will be introduced under the mutual fund (MF) structure, with specific relaxations in prudential norms. Although these relaxations might increase the associated risks, they can be mitigated by the higher minimum investment threshold.

Features of the new asset class include the option for systematic plans like systematic investment plans (SIPs) and the ability to invest in derivatives or derivative strategies for market exposure. Sebi emphasized the need for a distinct nomenclature to differentiate this asset class from traditional mutual funds and other existing investment products like PMS, AIF, REITs, and INVITs.

To facilitate offerings under the new asset class, Sebi proposed two eligibility routes for Asset Management Companies (AMCs): a strong track record route and an alternate route. AMCs with at least three years of operation, an average AUM of ₹10,000 crore over the past three years, and no regulatory actions against them would qualify. AMCs without this record could also qualify by appointing experienced fund managers and meeting specific AUM requirements.

Sebi outlined a two-stage registration process for the new asset class, similar to the current process for MFs. The new asset class will be branded and advertised distinctly from traditional MFs, allowing AMCs to offer investment strategies under a pooled fund structure. Redemption frequency can be tailored based on investment nature to manage liquidity effectively.

Sebi has invited public comments on these proposals until August 6.

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