This article discusses SEBI’s new proposal for creating a new investment product which will work like mutual funds but use sophisticated strategies that are not yet in India.
On 16 July 2024, SEBI published a consultation paper inviting comments on a proposal for a new asset class (NAC):
We have mutual funds starting at an affordable ₹500/investment. We also have Portfolio Management Services (PMS) that, as per SEBI rules, need a minimum of ₹50 lakhs/PMS. Also, unlike mutual funds, buying and selling inside a PMS exposes the investor to capital gains tax.
NAC stands in between the two: only ₹10 lakhs is the minimum investment size.
The new asset class funds, or strategies as SEBI wants a different name to keep them separate from mutual funds, fill a gap in the market:
Mutual funds in India can only be long-only. The term means that they can only buy their investments. A typical equity fund can invest in 100 shares of Company X if it thinks Company X is a good share. If the fund manager changes their mind about Company X being a good share, they can sell those 100 shares. They cannot sell more than 100 shares since short selling in the case of mutual funds is not allowed.
Now, under the NAC framework, the fund manager can sell, within limits, more shares of Company X than the fund holds. This is called short selling and is allowed in markets like the US so that a bearish view on a stock allows an investor to make money when the stock falls in price. This is the concept behind long-short funds where the fund manager can take an extremely bearish view on particular stocks.
Similarly, SEBI has mentioned inverse ETFs as another possible strategy. Inverse ETFs, using derivatives, give the opposite return as an index like the Nifty 50. A 2x inverse Nifty 50 ETF will rise 2 times the Nifty 50 fall value (and vice versa on a day the Nifty 50 rises) on a day the market falls. These investments are suitable for either intraday trading or short-term holding not beyond a few days.
Ultimately, the strategy of these funds will have to be approved by SEBI.
There is no clarity on taxation yet. Without more information, we can assume debt-oriented taxation, i.e. capital gains taxed at slab irrespective of the holding period.
Any other taxation structure, say the 10% tax on profits of equity-oriented funds, will be a welcome move.
It is expected that as long as the initial investment barrier of ₹10 lakhs is overcome, SIP (and later SWP) will be available. It is yet to be seen whether buying and selling will be made available daily or at certain intervals only. In the latter case, with interval-based trading, we will probably see these units listed on the stock exchange, just like ETFs, to allow another way to enter/exit.
SEBI has just come up today with a consultation paper. The asset management industry and AMFI will provide comments and then SEBI will come up with new regulations.
Once regulations come, then AMCs will float new schemes with SEBI approval.
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The objective is to bridge the gap between Mutual Funds and Portfolio Management Services (PMS) by introducing a new regulated investment product with higher risk-taking capabilities and a higher ticket size.
The new asset class is proposed to curb the proliferation of unregistered and unauthorized investment products by providing a regulated alternative that offers higher flexibility in portfolio construction.
Registered Mutual Funds with a strong track record or those meeting specific alternative criteria are eligible to launch the new asset class.
The minimum investment amount is INR 10 lakh per investor across the investment strategies within the new asset class offered by an AMC/MF.
Some proposed investment strategies include Long-Short Equity Funds and Inverse ETFs/Funds.
Yes, the new asset class can take exposure in derivatives for purposes other than hedging and portfolio rebalancing, subject to compliance with relevant provisions.
The new asset class will be distinctly branded from traditional Mutual Funds to maintain a clear separation, including specific nomenclature and disclaimers in advertisements.
The new asset class must disclose its portfolio on a monthly basis and provide all constitutional documents publicly.
The registration process involves a two-stage approval: in-principle and final approvals, similar to the process for Mutual Funds.
Relaxations include higher single issuer limits for debt securities, higher limits for equity investments, and the ability to invest in derivatives beyond hedging and rebalancing purposes.
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This post titled Understanding SEBI's proposed New Asset Class funds: will India get Long-short Hedge funds and Inverse ETFs? first appeared on 18 Jul 2024 at https://arthgyaan.com
