Evolution of a new asset class between PMS and Mutual Funds

Have you ever seen a toolbox? It has different tools, and each tool has different purposes. Similarly, in investing, you have diverse asset classes. An asset class is a group of investments that share similar characteristics. They often move together in the market and have similar risk profiles.

Just like you would not use a hammer to screw in a nail, you would not invest all your money in one asset class. Diversifying across different asset classes is like having the right tools for every job. Let us look at the major asset classes we have in India.

Existing asset classes in India

Let us look at the popular asset classes:

Fixed Income: This asset class is for people with low-risk profiles and looking for reliable returns. The risk is zero or almost zero. Fixed deposits and public provident funds (PPF) are two examples of this asset class.

Equity: These are the powerful tools in your toolkit. Investing in equity means that you own a business, and running a business is risky. You have the potential to earn high returns, but that comes with a risk. You can invest directly invest in equities or buy mutual funds.

Real Estate: This asset class includes options like buying a residential or commercial property. It may also include a plot or newly introduced REITs. This asset class can generate rental income and appreciate in value, but it requires maintenance.

Bonds: Not everyone wants to take high-risk investing in equity, nor do they want low returns by investing all their money in fixed-income options. Bonds fall somewhere in between these two. They provide stability and steady income - higher returns than fixed-income options and lower risks than equity.

Commodities: It can be anything ranging from properties, goods, or products that can be traded for different purposes. Gold, bronze, silver, food crops, petroleum, etc, are some examples of commodities.

New Asset class introduced by SEBI

Above, we have seen different asset classes that are currently available to Indians for investment. Securities and Exchange Board of India (SEBI) plans to introduce a new asset class to bridge the gap between mutual funds and Portfolio Management Services. Let us understand these options first. It will help you understand the need to have a new asset class.

Assume you have built your mutual fund portfolio of Rs 25 lakh. You already have investments in debt and real estate. Your goal is to generate higher returns on a part of your portfolio. You can take a PMS route to get returns higher by taking additional risks. However, to avail of PMS services, you need a minimum investment of Rs 50 lakh. So, you have no asset classes to meet your needs. Therefore, SEBI wants a new asset class. The new asset class which not be a product but investors will be offered as different strategies.

Details of the new asset class

The minimum investment for the new asset class is Rs 10 lakh, and it provides investors an option to investors to invest in other options (Alternative Investment Funds) and seek higher returns. The new asset class is still in the proposal stage.

Here are the qualifying criteria for companies that may offer these products:

Mutual funds must be in operation for at least 3 years and have an average AUM of not less than Rs 10,000 crore in the immediately preceding three years.
Chief Investment Officer (CIO) under the new asset class with experience in fund management of at least 10 years and managing AUM of not less than 5,000 crore.
An additional Fund Manager for the new asset class with experience in fund management of at least 7 years and managing AUM of not less than 3,000 crore.

How can investors invest?

As mentioned above, you must have a minimum of Rs 10 lakh to invest in the new asset class. The 10 lakh threshold aims to discourage retail investors from participating in this product while attracting those with investible surplus ranging from Rs 10-50 lakh. Investors will have the option to choose options such as investing in strategies under the new asset class

Systematic Investment Plan
Systematic Withdrawal Plan
Systematic Transfer Plan

To maintain investment continuity, an investor's total invested amount should not drop below Rs 10 lakh due to actions like withdrawals or systematic transactions.

Proposed relaxations for new asset class

The proposed relaxations to the investment restrictions are as follows:

Particulars	Existing limits under MF Regulations	Proposed limits for New Asset Class
Minimum investment size	Rs 500 (some MFs also accept SIP as low as Rs 100)	Rs 10 lakh per investor across investment strategies at the level of New Asset Class within AMC/MF
Single issuer limit for debt securities	10% of NAV (can be extended to 12% of NAV with prior approval of trustees and AMC Board)	20% of NAV (+5% with approval of trustees and AMC Board)
Credit risk-based single-issuer limit for debt securities	AAA – 10% AA – 8% A & below – 6% of NAV (+2% of NAV with the prior approval of trustees and AMC Board)	AAA – 20% AA – 16% A & below – 12% of NAV (+5% of NAV with the prior approval of trustees and AMC Board)
Ownership of paid-up capital carrying voting rights	10%	15%
Percentage of NAV in equity and equity-related instruments of any company	10%	15%
Investment in REITs and InvITs	Single issuer limit at MF across all schemes – 10%	Single issuer limit at New Asset Class level across all investment strategies – 20%
Sector-level limits for debt securities	20% in a particular sector	25% in a particular sector
Derivatives	Allowed only for hedging and portfolio rebalancing	May also be allowed to take exposure.

Before you go

The SEBI has sought feedback from individual asset management companies and the Association of Mutual Funds in India (AMFI) regarding the asset allocation and structure of the new category. They were supposed to submit feedback by August 6. Investors should wait for the final guidelines from SEBI and, based on details, take a call if this is the right investment option for them.