Mutual Funds: What are Sebi’s rules for a new asset class?

The capital markets regulator Securities and Exchange Board of India (Sebi) has released a set of new rules pertaining to introduction of new investment products i.e., ‘Investment Strategies’ and easier regulations for passive mutual funds.

The investment category is slated to bridge the gap between mutual funds and portfolio management services in terms of flexibility in portfolio construction.

In a recently released statement on Monday after the 207th meeting of the Sebi’s board, the markets regulator said the new investment product or asset class is expected to curb the proliferation of unregistered investment schemes, which assure unrealistic returns and exploit investors’ expectations, which – at times – also lead to financial risks.

Additionally, the Sebi board has approved amendments to the Sebi regulations to enable a relaxed framework with light touch regulations for passive schemes.

In its bid to launch investor-friendly norms for investors, Sebi announced, in its latest statement, to raise the maximum number of nominees from three to ten. There will be no limit to the number of times a nominee can be changed.

Let us understand more on these changes here:

Investment Strategies

A. The minimum investment limit for these schemes will be ₹10 lakh per investor across all strategies.

B. This asset class will fall somewhere between mutual funds and PMS (portfolio management services).

C. These will have adequate safeguards such as no leverage, no investment in unlisted and unrated instruments beyond what is permissible for mutual funds. Exposure to derivatives limited to 25% of AUM for purposes other than hedging and rebalancing.

D. These offerings will be referred to as 'investment strategies' to keep them separate from the traditional instruments of mutual funds.

Rahul Jain, President and Head, Nuvama Wealth, says, “The introduction of the New Asset Class by SEBI is a highly commendable move. It provides an excellent opportunity for high-net-worth individuals (HNIs) with high-risk appetites to capitalize on strategies such as long-short and inverse exchange-traded funds, which can significantly enhance their portfolios. Currently, these strategies are unavailable through traditional mutual funds. Importantly, these strategies will be managed by professionals in accordance with regulations set by the regulator."

Mutual Fund Lite Regulations

Sebi has released a set of rules to make its regulations light for the passive mutual fund schemes.

Since passive schemes follow a rule-based investment strategy and there is negligible discretion with AMCs regarding asset allocation and investment objective.

As a result, the Sebi board has approved an amendment to the Sebi regulations to enable a relaxed framework with light touch regulations — MF Lite framework for entities which intend to launch only passive mutual fund schemes.

Now the existing AMCs which have both active and passive schemes will have the option to run passive schemes under a different group entity, thus resulting in management of active and passive schemes by separate AMCs under a common sponsor.

The light touch regulations entail relaxed requirements relating to eligibility criteria for sponsors, including net worth, track record and profitability, responsibility of trustees, approval process and disclosures.

“If they choose to continue the passively managed schemes within the existing AMCs under the existing MF Regulations, the relaxed disclosures and other regulatory requirements for the passive schemes based on indices that would be covered under the MF Lite framework would be applicable to them as well,” reads the Sebi statement.