I have a piece with Navneeta Shankar in today’s Financial Express on the new Alt-Fund proposed by SEBI. It’s a good idea to permit a new category which allows higher risk taking than a classic mutual fund. The full piece is as below:
The current investment landscape in India is designed to cater to various investor categories. Retail investors typically have access to mutual fund schemes with a low entry point, while high net-worth individuals (HNIs) and institutional investors can opt for Portfolio Management Services (PMS) with a minimum investment of INR 50 lakhs and Alternative Investment Funds (AIFs) with a minimum investment value of Rs 1 crore. However, there exists a notable gap for retail investors who wish to invest, say, Rs. 20 lakhs in direct equityand who want to take a much higher risk.
To address this issue, the Securities and Exchange Board of India (SEBI) issued a consultation Paper dated July 16, 2024, proposing a new asset class that will permit Asset Management Companies (AMCs) to offer new sets of investment products, including investment in derivatives or derivative strategies, to Indian investors. The proposed semi-alternate asset (Salt Asset class) is aimed at bridging this gap between mutual funds and PMS and is envisaged to provide investors with a regulated investment product with higher risk-taking capabilities.
In the absence of a favourable regulatory architecture, retail investors were becoming vulnerable to falling for unregistered and unauthorized investment products, which often promise unrealistically high returns and exploit the investors’ expectations for better yields. The Salt Asset, with a return risk-profile positioned between mutual funds and PMS, is intended to provide investors with a secure and regulated option. This new class would serve as a customized investment product offering greater flexibility, higher risk-taking capability and a higher ticket size, catering specifically to this emerging category of investors.
SEBI has proposed for this to operate under the mutual fund structure but with relaxed prudential norms. In order to enable existing and newly registered mutual funds/ AMCs to offer products, SEBI has proposed two routes of eligibility criteria. Existing mutual funds would be required to demonstrate a strong track record by being in operation for at least three years with an average Assets Under Management (AUM) of Rs. 10,000 crores over preceding three years, and no regulatory actions in the previous three years. For newly registered mutual funds or existing ones that are unable to show strong track record, requiring experienced fund manager and chief investment officer with demonstrable experience, and no regulatory actions against the sponsor/AMC in the last three years.
Since the products offered under the Salt Asset Class will be relatively riskier than the schemes offered by traditional mutual funds, there is a need to maintain a clear distinction between the branding of products under the Salt Asset and those under the traditional mutual funds. To achieve this, SEBI has proposed that the Salt Asset be branded and advertised as a product distinct from the traditional mutual funds. This, in SEBI’s view, will ensure that any potential misconduct/ failure in the performance does not negatively impact the confidence of retail investors in traditional mutual funds.
Under the proposal, AMCs can offer ‘Investment Strategies’ with flexible redemption frequencies tailored to the nature of investments, allowing investment managers to adequately manage liquidity without imposing undue constraints on the investors. Importantly, no investment strategy under the Salt Asset class may be launched by an AMC unless the same is specified by SEBI and approved by the trustees, subject to final observations on the offer documents by SEBI.
SEBI has proposed a minimum investment amount of Rs. 10 lakhs per investor, across one or more Investment Strategies under the Salt-y Assets offered by an AMC. This threshold, in SEBI’s view, will deter retail investors from investing in this product, while attracting investors with investible funds between Rs. 10 lakhs – Rs. 50 lakhs who are being drawn to unregistered PMS providers and those who perhaps cannot commit to an investment in an alternative investment fund (AIF) which requires a commitment of Rs. 1 crore per investment.
It has also been proposed that all investments permissible to mutual funds under the current regulatory framework will also be available for the Salt Asset. Additionally, it will be permitted to take exposure in derivatives for purposes other than hedging and portfolio rebalancing to allow more flexibility and risk-taking in investments. Investors will also be given the option of systematic plans, including withdrawals and transfers, for investment strategies, though at no point in time the total invested amount of an investor should fall below Rs. 10 lakhs for reasons other than depletion in the value of the investments.
SEBI’s proposal is a significant step towards democratizing the securities market and makingit more accessible to average Indians. With the proliferation of ‘finfluencers’ and the consequent rise in misinformation in the investment advisory space, the proposed Salt Assetoffers new avenues specifically for this emerging category of investors, who are likely to be propelled towards unregistered and unauthorized investment schemes while seeking flexibility in portfolio construction along with higher risks and returns. The initiative also paves the way for adopting thematic investment strategies like electric vehicles, water management, recycling, and renewable energy. The Salt Asset is likely to attract both the mass affluent and high net-worth individual investors by offering them new avenues for investment in emerging sectors.
A Salt Asset coupled with the convenience provided by regulated mutual fund platforms will not only facilitate ease of investment but will also promote the concept of domestic mutual fund participation in sophisticated investment strategies, including in long-short equity and inverse ETF. That being said, SEBI is encouraged to not restrict the proposed investment product to only AMCs but consider permitting other registered intermediaries to offer products under the Salt Asset as well. Alternatively, SEBI may consider creating an altogether new category of a registered intermediary to provide this investment option, which could be regulated by a separate set of rules with much less compliance burden and restrictions than those on mutual funds/AMCs.
SEBI's introduction of Salt Assets reflects its commitment to fostering innovation and growth in the Indian financial markets, while also weening investors off spicier unregulated productsor unregulated offerings. While the success of this initiative remains to be seen, it promises to create a dynamic and inclusive financial market. This move will offer diverse investment opportunities, catering to the varied needs of Indian investors and contributing to the development of a more robust and resilient financial ecosystem. Similar to Mini-Reitsintroduced by SEBI, this move will bring in players and investors outside the margins of the securities market into a formal, regulated sphere of predictability and regulatory comfort.
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