Is SEBI Planning A New Investment Class Between Mutual Funds And PMS?

In a move that has caught the attention of the Indian financial market, SEBI, under the leadership of Madhabi Puri Buch, is exploring the creation of a new investment avenue. This initiative could bridge the gap between mutual funds and Portfolio Management Services (PMS), targeting a specific group of investors comfortable with high-risk, high-reward scenarios.

The Genesis of the Idea

The idea emerged during Buch's Delhi CII Global Economic Policy Forum address. She emphasised the urgent need for such an asset class, especially after increasing retail investor participation in the equity market after the coronavirus outbreak. This surge has highlighted the average investor's need for regulated, high-risk investment options.

As retail investors' ownership in India's top companies continues to grow, with a rise from 6.16% in Nifty50 companies in September 2019 to 6.98% in September 2023 and a similar increase in NSE100 and NSE200 companies, SEBI's concerns about these investors seeking advice from unregistered advisers gain more significance.

This uptrend in retail investment highlights the critical need for reliable and regulated financial guidance. Unregistered advisers often lead investors towards high-risk investments that require careful oversight to be beneficial. In response, SEBI's proposed new asset class attempts to provide a structured and safer investment alternative for these increasingly active retail investors.

1. Regulated High-Risk Investments

As chairperson Madhabi Puri Buch articulated, the proposed asset class by SEBI seeks to create a balance for investors willing to engage in high-risk investments. The initiative aims to moderate the allure of potentially high returns by setting a higher investment threshold and incorporating specific restrictions. This measure is a proactive step to ensure that investors do not expose themselves to undue risks, which can often happen in high-return scenarios.

2. Tackling the Concern Over Unregulated Advice

One of the primary motivations behind this new asset class is the concern over retail investors being swayed by unregulated and sometimes illegal investment advice. This issue has become more pronounced with the influx of new investors, especially after the COVID-19 outbreak, many of whom are inexperienced with market cycles and vulnerable to high-risk strategies. SEBI aims to protect these investors from the pitfalls of unsound financial advice by offering a regulated investment option.

3. Addressing the Minimum Investment Dilemma

The current investment landscape in India presents a stark contrast between mutual funds, which allow entry-level investments as low as Rs 5,000 or Rs 100 through SIPs, and PMS or AIFs, which require a much higher capital commitment. The proposed asset class strategically positions itself to cater to investors between these extremes - those who can invest more than the mutual fund threshold but less than the minimum required for PMS or AIFs.

4. Ensuring Regulation and Safety

Incorporating this new asset class within the mutual fund framework would mean bringing it under the stringent regulatory scope of SEBI. This move is vital for ensuring enhanced safety and oversight, as opposed to the risks associated with unregulated high-risk schemes. This regulatory oversight is expected to provide a safer environment for investors to explore higher-risk investment opportunities.

Final Note

SEBI's proposal for a new asset class reflects its commitment to enhancing the investment landscape while ensuring investor protection and market integrity. The market eagerly awaits further details on this proposed asset class's structure, benefits, and regulations.

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