New Investment Vehicle, Same Old Greed And Fear

It is at this time that the markets regulator Securities and Exchange Board of India has introduced the categorisation of a new investment product that will be manufactured and sold by the asset management industry. It’s been rechristened Specialised Investment Fund – a change from the original ‘new asset class’, which was perhaps an inaccurate description.

The new funds will be launched, as I said, by AMCs, but will be distinct from existing products, sitting somewhere between mutual funds on one end and Portfolio Management Services and Alternative Investment Funds on the other. They will have a greater degree of risk than your regular mutual funds, and so the regulator has insisted on a minimum investment threshold of Rs 10 lakh in multiple strategies at the PAN level.

Included in the regulator’s categorisation were a number of ‘long-short funds’ in overarching equity, debt and hybrid categories. These schemes will invest a portion of assets under management into equity – in the case of equity schemes – and will reserve a certain portion for derivatives. This is not currently available in the bouquet of products offered by the mutual fund industry. It compares with options provided by Category III Alternative Investment Funds. The thing is, the taxation of these equity schemes will be similar to mutual funds and so they’ll be superior to AIFs.

It is at this time that the markets regulator Securities and Exchange Board of India has introduced the categorisation of a new investment product that will be manufactured and sold by the asset management industry. It’s been rechristened Specialised Investment Fund – a change from the original ‘new asset class’, which was perhaps an inaccurate description.

The new funds will be launched, as I said, by AMCs, but will be distinct from existing products, sitting somewhere between mutual funds on one end and Portfolio Management Services and Alternative Investment Funds on the other. They will have a greater degree of risk than your regular mutual funds, and so the regulator has insisted on a minimum investment threshold of Rs 10 lakh in multiple strategies at the PAN level.

Included in the regulator’s categorisation were a number of ‘long-short funds’ in overarching equity, debt and hybrid categories. These schemes will invest a portion of assets under management into equity – in the case of equity schemes – and will reserve a certain portion for derivatives. This is not currently available in the bouquet of products offered by the mutual fund industry. It compares with options provided by Category III Alternative Investment Funds. The thing is, the taxation of these equity schemes will be similar to mutual funds and so they’ll be superior to AIFs.

So, at least hypothetically, these new SIFs will draw interest from mutual fund investors looking to move up the value chain, so to speak. That’s because AIFs and PMS have a much higher minimum investment threshold. It will also be attractive to those looking for more tax-efficient investment options. But retail investors should think a few times before deploying a substantial portion of their hard-earned savings into these products, even if they can stump up the minimum investment amount.

I spoke Radhika Gupta, the managing director and chief executive officer of Edelweiss Mutual Fund about who she thought should invest in these products when they’re eventually launched. She is of the opinion that investors should not deploy more than 5-10% of their corpus into these schemes. And that precludes the average retail investor from considering these as an option till much, much later in their investment journeys.

I wrote about the proliferation of sectoral and thematic funds in last week’s letter. The SEBI Chairperson took note of the sheer flood of these schemes that hit the market over the last year. This week it was made known that this will be reviewed  by the regulator and measures will likely be contemplated to stem the launches of these schemes.

The regulator has also tightened rules that govern new fund offers by mutual funds. It has stated that mutual funds need to quickly deploy the monies received during the NFO phase. In a circular issued this week, the regulator said that mutual funds will have to deploy the proceeds from the launch phase within 30 business days. This is effective April 1.

In cases where this is not done and adequate reasons are not provided, fresh investments into schemes may be paused, according to the new rules.

The regulations should curb ill-thought-out launches by AMCs who are looking to mobilise funds.

Government sources have told NDTV that the central board of trustees of the Employee Provident Fund Organisation has decided to recommend 8.25% as the rate of interest for the financial year ending March 2025. If this is approved by the government, the rate paid to investors will be the same as that paid in the previous year.

I began this letter alluding to the miserable few months Indian investors have had to contend with. However, if you’re investing in the equity market with the next decade in mind, this is perhaps the best opportunity for you to accumulate as much as you can. The greatest investors in the world say you should be greedy when others are fearful and fearful when others are greedy. This sounds incredible, but is, more often than not, very difficult to put into practice.