SEBI's Proposed New Investment Product

The Securities and Exchange Board of India (SEBI), the regulator for the securities market in India, has proposed the introduction of a new investment product. This product aims to cater to a specific group of investors who are looking for a product with a higher risk-return profile than traditional Mutual Funds (MFs) but are unable to afford the high minimum investment required by Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs).

About the new product

• This new product will be a regulated investment vehicle designed to fill the gap between Mutual Funds and PMS/AIFs, offering more flexibility for investors while maintaining necessary safeguards to manage risks.
• Need for This New Investment Product: Currently, investment vehicles in India are classified primarily into three categories based on the amount of investment required:
  • Mutual Funds (MFs): These are designed for retail investors with a low minimum ticket size, typically Rs 500. MFs are low-risk investments that are regulated by SEBI and provide relatively safer returns.
  • Portfolio Management Services (PMS): These are targeted at High Net-Worth Individuals (HNIs) who can afford a minimum investment of Rs 50 lakh. PMS generally involves personalized investment strategies with more flexibility and higher risk.
  • Alternative Investment Funds (AIFs): These funds require a minimum commitment of Rs 1 crore and are typically focused on providing high returns through investments in non-traditional assets such as private equity or venture capital.
• The gap between MFs and PMS/AIFs has left a group of investors who want higher returns than MFs but cannot afford the high entry threshold of Rs 50 lakh for PMS or Rs 1 crore for AIFs. To address this need, SEBI is proposing the creation of a new product that sits between these two categories in terms of risk and ticket size.

Mutual Funds (MFs), Portfolio Management Services (PMS), and Alternative Investment Funds (AIFs)

• Mutual Funds (MFs): Mutual Funds are investment vehicles where a pool of money from multiple investors is gathered and managed by a professional fund manager. These funds are invested in a diversified portfolio of stocks, bonds, or other securities, depending on the type of Mutual Fund (e.g., equity funds, debt funds, hybrid funds).
• Types of Mutual Funds:
  • Equity Funds: Primarily invested in stocks of companies.
  • Debt Funds: Invest in bonds or fixed income securities.
  • Hybrid Funds: Invest in both stocks and bonds.
• Portfolio Management Services (PMS): Portfolio Management Services (PMS) are tailored investment services provided by professional fund managers for individual investors.
• Types of PMS:
  • Discretionary PMS: The fund manager makes investment decisions on behalf of the investor.
  • Non-Discretionary PMS: The investor makes the final decision on the investment choices, but the portfolio manager provides recommendations.
  • Ideal For: High-net-worth individuals (HNIs) or investors who want personalized investment strategies and have a significant amount of capital to invest.
• Alternative Investment Funds (AIFs): Alternative Investment Funds (AIFs) are investment vehicles that invest in non-traditional assets such as private equity, venture capital, hedge funds, real estate, commodities, and other alternative assets.

• Types of AIFs:
• Category I: Focus on investments in startups, social ventures, or infrastructure projects (e.g., venture capital funds).
• Category II: Funds that are not specified under Category I or III, and may include private equity or debt funds.
• Category III: Hedge funds that seek to generate high returns by using complex strategies like leverage, derivatives, etc.

Key Differences Between MFs, PMS, and AIFs