The new asset class (NAC) proposed by the market regulator could see diverse product offerings with high-risk strategies across equity and debt if the mutual fund (MF) industry’s recommendations are incorporated into the final regulations.
While the Securities and Exchange Board of India (Sebi) has suggested relaxations in investment norms for NAC compared to traditional MFs, some fund houses are advocating for further relaxations in concentration norms, greater flexibility in leverage, and the ability to invest in securities currently outside the MF domain, such as unlisted debt papers and debentures, sources reveal.
In July, Sebi issued a consultation paper aiming to introduce NAC, which would sit between MFs and portfolio management services.
Only MFs will be able to launch NAC products, which will require a minimum investment of Rs 10 lakh.
According to senior MF executives, fund houses have submitted their recommendations to the industry association, which will compile them and forward them to Sebi.
Interest is particularly high on the debt side, as the industry perceives a gap in the demand for higher-return debt products.
Proposed strategies include closed-ended credit risk funds, hybrid debt and real estate investment trust funds, and sectoral and thematic debt funds with the flexibility to take high-concentration bets on lower-rated papers.
“The regulator has proposed a 25 per cent limit on sectoral exposure for debt funds.This should be increased to about 50 per cent to better accommodate sectoral and thematic debt funds,” said an MF executive.
Some fund houses have also called for allowing leverage of up to 300 per cent.
On the equity side, proposed strategies include long/short funds, concentrated equity funds, and active domestic and international exchange-traded funds.
In addition to strategy and investment flexibility, recommendations from MFs include lowering the eligibility criteria for NAC approval and adopting a flat expense ratio model instead of the slab framework currently applicable to MFs.
The consultation paper proposes two eligibility criteria for MFs seeking an NAC licence.
The first requires that the fund house be at least three years old and have a minimum average assets under management (AUM) of Rs 10,000 crore.
Under the alternative route, the fund house must appoint a chief investment officer with at least 10 years of experience managing an AUM of at least Rs 5,000 crore.
The fund manager should also have a minimum of seven years of experience managing at least Rs 3,000 crore.
Not all fund houses support more lenient norms for NAC.
Some argue that there should be limits on strategies and additional restrictions on investors beyond the minimum investment threshold.
“Only serious investors should participate in such offerings, given the risks involved. One approach is to permit only accredited investors,” said a senior MF executive.
