The Securities and Exchange Board of India (SEBI) has initiated discussions with the Association of Mutual Funds of India (AMFI) regarding the potential introduction of a distinct mutual fund segment. This segment is geared towards funds with higher risk profiles, offering the possibility of increased returns for investors.
The proposed funds in this category will have the flexibility to invest in strategies and instruments that carry higher risks and potentials, like long-short strategies, junk bonds, and microcap stocks. These are generally areas of the market that offer a chance for higher returns but come with more significant risks.
A primary consideration for SEBI is safeguarding the interests of small-scale investors. The objective is to ensure these investors don’t inadvertently commit to high-risk investments without a comprehensive understanding of the potential downsides. As a protective measure, SEBI recommends that this new segment, if approved, mandates a more substantial minimum investment threshold. This would ensure only those with the means to invest larger sums can access these riskier funds, providing a safety net for less experienced or smaller investors.
Currently, there are five distinct risk-associated categories for mutual funds: minimal, marginally low, balanced, somewhat high, and elevated risk. Introducing this new category would accommodate funds that might have risk parameters surpassing the present ‘elevated risk’ classification.
In its communication, SEBI has asked the industry for feedback on how this new scheme should be structured, especially concerning asset allocation. They are also keen to know if there are any current regulatory requirements that may need to be relaxed to facilitate this new category. Importantly, SEBI wants recommendations on what the minimum investment amount for these funds should be.
Insiders from the industry believe that SEBI’s initiative aims to provide retail investors with opportunities similar to Portfolio Management Services (PMS) that generally have higher return potentials. Currently, PMS funds have a substantial minimum investment requirement of ₹50 lakh, making it challenging for most retail investors to access. By creating this new mutual fund category, SEBI hopes to offer similar high-return opportunities to a broader range of investors but at a lower entry point than the current PMS requirement.
SEBI expected feedback from the industry by October 25. However, AMFI, which represents mutual fund houses, is still discussing the proposal and has not yet provided its collective feedback.
This development signifies SEBI’s intent to evolve the mutual fund industry, providing more diverse investment opportunities while ensuring the protection of all types of investors.
