Capital Markets: Challenges and Developments

New Asset Class proposed by SEBI

Prelims Only | Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth
Note4Students

From UPSC perspective, the following things are important :

Prelims level: New Asset Class, Mutual Funds, Portfolio Management Services (PMS)

Why in the News?

  • The markets regulator, SEBI, has proposed a new asset class designed to offer investment products positioned between mutual funds (MFs) and portfolio management services (PMS).
    • This new category aims to fill an opportunity gap for investors and offer greater flexibility in portfolio construction.

Note:

  • PMS provides customized investment solutions to high net-worth individuals (HNIs) with a minimum investment limit of Rs 50 lakh.
  • MFs, on the other hand, have a much lower minimum investment limit of just Rs 100, managed by a professional fund manager.

About the New Asset Class

  • The new asset class aims to provide an intermediate option with more flexibility in portfolio construction, helping investors avoid unregistered and unauthorized schemes.
  • It will have a risk-return profile between MFs and PMS, targeting investors with higher risk tolerance and larger investment amounts than those typical of MFs but lower than PMS.
  • The current range of investment products includes:
  1. MF schemes: Focused on retail investors,
  2. PMS: For HNIs, and
  3. Alternative investment funds (AIF): For sophisticated investors.

How will investments in the new asset class work?

  • The new asset class will be introduced under the MF structure with necessary relaxations in prudential norms.
  • The minimum investment amount is proposed to be Rs 10 lakh per investor within the asset management company (AMC)/MF.
  • This high threshold is intended to deter retail investors while attracting those with investible funds between Rs 10 lakh and Rs 50 lakh.

Significance of the New Asset Class:

  • SEBI noted that the gap between investment opportunities in MFs and PMS has led some investors towards unauthorized investment avenues.
  • The new asset class will help curb the proliferation of unregistered investment products and provide a structured and regulated option for investors.
  • SEBI emphasized that the new asset class would offer a regulated and structured investment suited to investors looking for opportunities between MFs and PMS.

Investment Strategies:

  • Like MF schemes, the new asset class will provide options for Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP).
  • AMCs can offer ‘investment strategies’ under a pooled fund structure with tailored redemption frequencies (daily, weekly, monthly, etc.).

PYQ:

[2021] Indian Government Bond Yields are influenced by which of the following?

  1. Actions of the United States Federal Reserve
  2. Actions of the Reserve Bank of India
  3. Inflation and short-term interest rates

Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3

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