Navigating the New Investment Landscape: SEBI’s Latest Asset Class

If you’ve been investing in India for a while, you’re probably familiar with the most common choices: mutual funds, fixed deposits, or, if you have a lot more money, Portfolio Management Services (PMS). But what if you find yourself stuck somewhere in between—wanting more sophisticated options than mutual funds but not quite ready to dive into the deep waters of PMS? This is where the Securities and Exchange Board of India (SEBI) has stepped in with a new asset class designed to bridge that gap.

The Missing Middle in Indian Investing

For years, investing in India has been a tale of two extremes. On one end, you have mutual funds, accessible to almost everyone—you can start with as little as ₹500 a month. On the other, you have options like PMS and Alternative Investment Funds (AIFs) that cater to the wealthy, typically requiring a minimum of ₹50 lakhs or even ₹1 crore. So, what about those who fall in the middle?

Consider Durga, a retired banker looking to invest ₹10 lakhs for her grandchildren’s college expenses. For investors like Durga, mutual funds might feel a bit too vanilla. They want something more advanced—strategies that promise a little more upside or some protection when markets get rough. However, the high entry barriers of PMS and AIFs make them out of reach. SEBI’s new asset class aims to change that, targeting investors who want to explore advanced strategies without needing crores to invest. Think of it as the Goldilocks zone of investments—something that’s “just right.”

What Makes This New Asset Class Different?

Unlike regular mutual funds, which are categorized based on the type of stocks (large-cap, mid-cap, etc.), this new class focuses on investment strategies. Fund managers can employ complex tactics like long-short equity or inverse ETFs—strategies typically reserved for institutional investors. Let’s break down a couple of these strategies:

Long-Short Equity Funds

Imagine a fund that can bet on both winning and losing horses. If the fund manager believes that IT stocks are going to rise, they’ll “go long” by buying those stocks. Conversely, if they think banking stocks will fall, they’ll “short” those stocks—betting on their decline. This dual approach allows the fund to potentially profit regardless of market direction.

Inverse ETFs

These are essentially the opposite of your typical mutual funds. Instead of aiming to grow when the market rises, inverse ETFs are designed to profit when the market falls. If you have a bearish outlook or want to hedge against a downturn, an inverse ETF might be a suitable option.

These strategies were previously available primarily in AIFs, which usually require a hefty ₹1 crore minimum investment. SEBI’s new asset class lowers the bar, allowing individuals with ₹10-50 lakhs to explore these advanced investment strategies.

Why is SEBI Doing This Now?

You might wonder why SEBI is introducing this asset class at this particular moment. The concept isn’t new globally; similar strategies have been around in Europe and the US for over a decade, especially following the 2008 financial crisis. In Europe, for instance, they have “liquid alternatives”—strategies that act like hedge funds but are packaged like mutual funds. These were created to offer everyday investors some of the perks that high-net-worth individuals (HNIs) enjoy, such as hedging against volatility or capturing gains from market downturns.

However, these “liquid alternatives” haven’t always performed well. Studies show that in the 2010s, these funds averaged less than 2% returns annually. While they were safe, they didn’t exactly generate wealth. This underperformance is often attributed to the skill required for effective management, as even the best managers sometimes struggle to outperform basic stock and bond markets. Nevertheless, SEBI is pushing this initiative because Indian investors are becoming more sophisticated and are seeking options beyond the basics.

The Upsides

More Options for Serious Investors

This new category is perfect for individuals who want more from their investments but aren’t ready for PMS-level commitments. It caters to those who have more than the bare minimum but not enough to go all out.

Risk-Adjusted Returns

Strategies like long-short equity can help balance risk better than traditional mutual funds. They can hedge against market downturns, making them attractive during uncertain times.

Better Liquidity and Flexibility

Many of these funds offer flexible withdrawal options—daily, monthly, or annually. Some might even be listed on stock exchanges, making it easier to buy and sell units.

Lower Entry Barrier

Unlike AIFs, which require a massive ₹1 crore minimum investment, these funds target the ₹10-50 lakh segment, making them much more accessible.

The Downsides

Higher Costs

These funds will likely come with higher expense ratios due to active management. This means a larger portion of your investment goes toward fees compared to a simple index fund.

Complexity

Understanding these strategies isn’t straightforward. It’s not just about “buying low and selling high.” Investors need to be comfortable with terms like “going short” and “hedging.”

Performance Uncertainty

Globally, similar strategies have struggled to outperform basic stock and bond markets. This could be the case in India as well, especially in a market where active management already faces challenges.

Should You Consider SEBI’s New Asset Class?

It ultimately depends on your position as an investor. If you’re like Durga, sitting on ₹10-50 lakhs and wanting more than what a regular mutual fund offers, this could be worth exploring. However, it’s crucial to do your homework. Don’t just chase returns—look at the fund manager’s track record, understand the strategies, and consider the costs.

Remember, while these strategies work well in theory, execution is what makes or breaks them. SEBI’s new asset class is a promising addition to the Indian investment landscape, but it’s not a silver bullet. It’s just one more option to consider in your quest for better returns.

Final Thoughts

In conclusion, SEBI’s new asset class is a welcome move for serious investors looking to go beyond traditional options. It offers more choices, much-needed flexibility, and a chance to explore advanced strategies without diving into the deep end. However, like any investment, it comes with its own set of risks and caveats. Approach it with caution, conduct thorough research, and always keep your investment goals in mind.

(The author, Chakravarthy V., is Cofounder and Executive Director, Prime Wealth Finserv.)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own and do not represent the views of the Economic Times.)