SEBI Proposes New High-Risk Investment Avenue: A Game-Changer for Savvy Investors?

If you’re looking for high-risk, high-return investment options in a regulated environment, Sebi has a new proposal for you. The regulator plans to introduce a new asset class for investors willing to take on more risk. This new investment vehicle aims to bridge the gap between traditional mutual funds and portfolio management services (PMS), which are typically for wealthier investors.

What’s on Offer?

The new asset class, yet to be named, will fall under the mutual fund structure. It will be managed by a mutual fund company and overseen by a trustee. The minimum investment required will be Rs. 10 lakh, unlike traditional mutual funds which start at Rs. 500. This is lower than the Rs. 50 lakh minimum for PMS, positioning it between mutual funds and PMS.

This new asset class will offer unique investment strategies with different risk-return profiles not usually available to many investors. Some proposed strategies include ‘long-short equity funds’ and ‘inverse exchange-traded funds.’ Sebi hopes this product will attract investors who usually go for unregulated options due to the lack of affordable high-risk choices.

Tarun Birani, Founder of TBNG Capital Advisors, said, “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 of Dezerv, remarked, “Investors with higher risk profiles can now access regulated opportunities without the high minimum thresholds of PMS and AIF, or resorting to unregulated structures, which bodes well for the protection of wealth that India creates.”

More Relaxed Guidelines

The new asset class will operate under more relaxed guidelines compared to traditional mutual funds. For instance, they can 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 for mutual funds. Sector-level limits for debt securities have increased to 25% from 20%. The exposure to REITs and INVITs has doubled to 20% on aggregate and 10% for a single issuer.

These strategies can also use derivatives for purposes other than hedging and portfolio rebalancing. In terms of taxation, it will be similar to mutual funds, where investors don’t incur tax until they sell their holdings.

Higher Risk, Higher Reward

The new strategies will involve higher risks, mainly using derivatives. This will allow investors to bet on various market scenarios, not just rising markets. For example, a long-short equity fund will place bets on both rising and falling markets, unlike traditional long-only equity funds. Inverse ETFs will enable investors to bet on market declines without borrowing or selling stocks. If managed well, these strategies could potentially generate high returns.

Rohit Shah, Principal Officer at GYR Financial Planners, believes this option is not just for big investors. “Retail investors forming part of the upper middle class can explore this avenue as it sits midway between mutual funds and PMS,” he says.

However, some experts are cautious about these new strategies. Kalpesh Ashar, Founder of Full Circle Financial Planners and Advisors, said, “This avenue will diminish the simplicity that is the USP of mutual funds.” Even if you can afford the Rs. 10 lakh investment, the strategies might not suit your risk tolerance. Existing mutual funds already meet most financial goals, and exotic products may not be necessary for most investors.

Birani also warns, “Mis-selling is a potential risk. They must be sold strictly with investors’ risk tolerance in mind.” These new products are likely to come at a higher cost than traditional mutual funds, and it remains to be seen if their performance justifies the higher expense.

Conclusion

Sebi’s new asset class offers a higher risk-reward ratio, allowing investors to take bets on various market scenarios. It aims to attract those seeking more adventurous investments while staying within a regulated framework. However, investors should carefully consider their risk appetite and financial goals before diving into this new option.