The new asset class proposed by the Securities and Exchange Board of India (Sebi) is expected to bring innovative investment products and styles in the market, but could also encourage some investors to move from existing high-risk products like portfolio management services (PMS) and alternative investment funds (AIFs).
In comparison to mutual funds starting at Rs 100 and PMS at Rs 50 lakh, the new asset class, which targets investors with higher risk appetite with a minimum investment of Rs 10 lakh, can provide them with the higher alpha that many seek. “PMS/AIF may get disadvantaged if it causes cannibalisation of their AUM in favour of the new asset class from large, moneyed investors (i.e. their target clients),” said Ruchir Kapoor, managing director at Merisis Wealth.
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PMS and AIF currently require limited disclosures, but the new product is suggested to operate under stringent regulatory conditions, with monthly portfolio disclosures and publicly available foundational documents like mutual funds. This level of transparency is expected to attract investors over traditional PMS, allowing them to make more informed decisions.
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The high entry barrier for PMS and AIF, which limits opportunities for even HNIs to diversify their risk, is also addressed. With a Rs 50-lakh investment, an investor can invest in one PMS, but the same amount can now create a portfolio of five new asset class products, thereby spreading risk.Tax efficiency is another crucial factor that could drive HNIs and UHNIs towards this new product. While market participants await more clarity on taxation norms, the new asset class is expected to be taxed according to the underlying asset.
“It can be assumed that investments in the new asset class will be taxed at par with the existing MF structure, i.e, with pass-through status. In that case, the new asset class will be more tax efficient compared to Category III AIFs, which do not yet enjoy pass-through status,” said Rahul Jain, president and head, Nuvama Wealth.
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Sports betting site VPbet This means the new product offers the same tax efficiency as mutual funds, where gains and losses are consolidated within the fund and only realised when the investor redeems their units. This is simpler than PMS, where stocks are traded in the investor’s books of accounts, treating every trade as a separate capital gain or loss event, leading to complex calculations and high taxes.
The allowance for the use of derivatives for more than just hedging and rebalancing is a first and could be a diverse opportunity for investors to tap into that market safely, experts said.“It is a good move as it allows one to benefit from the derivative strategies, which would be run by professional fund managers having good understanding of the segment and in a more tax-efficient manner,” said Feroze Azeez, deputy CEO of Anand Rathi Wealth. He said the use of derivatives in a calibrated manner can bring better consistency and predictability of returns, as well as enhance returns due to the built-in leverage at high risk for investors.
“Looking at the F&O frenzy, this move can help participants with high risk-taking capability to participate in the derivatives market with professional expertise. New asset class participation in the derivatives will also promote institutional balance to FII participation in the F&O market,” Azeez said.
Market experts suggest some possible strategies for this new asset class, such as debt plus derivative strategy, reverse arbitrage, managed futures, and multi-asset strategies, apart from the long-short equity and inverse ETF mentioned in the draft paper. This move is expected to open up new avenues for investors, enabling participation in differentiated investment styles and diversifying portfolios akin to global markets.
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