New asset class will act as a bridge between mutual funds and PMS for investors

The announcement of a New Asset Class (NAC) by SEBI has created a buzz and led to a lot of speculation on its specifics and impact. Veterans of the mutual fund industry, Akhil Chaturvedi, Executive Director & CBO, Motilal Oswal MF, Gaurab Parija, Head – Sales and Marketing, Bandhan MF, Ruchi Pandey, CEO, Old Bridge MF and Saugata Chatterjee, CBO - Sales & Distribution, Nippon India MF discussed the rationale behind the NAC, its positioning, investment options and possible taxation benefits over AIF and PMS in a panel discussion at Cafemutual Confluence 2024. The discussion was moderated by Hemant Rustagi, Founder, Wiseinvest. 

Here are the highlights of the discussion.

Rationale behind the NAC

While talking about the rationale behind the NAC, Saugata Chatterjee said that in the last few years, a lot of investors have evolved from retail to HNI. They are looking for better investment options which is also indicated by the growth of AIF and PMS industries. However, the entry level is high for both these products. NAC can be a bridge between mutual funds and AIF and PMS. NAC will also mean that Rs. 10 lakh entry barrier will become the new threshold for HNIs in mutual funds.
In addition, as NAC will be under regulatory landscape of mutual funds and will be launched by AMCs with minimum vintage of 3 years and AUM of Rs. 10,000 crore or AMCs with multiple CIOs with experience in managing assets, it will bring credibility to it and create a clear filter between retail and HNI investors. It will also offer options for AMCs to customize. He added that his AMC is deliberating on whether NAC will require a new team to handle the new product or not. 

NAC positioning

When asked about whether NAC will democratize the investment landscape, Akhil Chaturvedi said that MFs have done a good job at attracting retail investors and is a convenient and scalable investment option. Meanwhile, PMS is for those investors who have investible surplus and higher risk appetite which is managed at a client level. 

AIFs also offer exciting investment avenues including venture capital funds, private equity, private credit and a combination of listed & unlisted MF like products in Cat III. However, PMS and AIF have some tax disadvantages due to taxation on portfolio churn. The number of unique investors in PMS and AIF is very less compared to mutual funds. They are riskier investments for investors with lower investible surplus NAC can help in democratizing investments by allowing investors with smaller ticket size to invest in more innovative avenues. 

Boutique, sophisticated strategies at lower ticket size can increase the number of participants in NAC schemes. With increase in number of HNIs, the NAC will have a lot of potential customers for growth. MF like regulatory structure will make NAC more protected and offer diversification and investment options for MF investors. 

NAC investment strategies

While talking about possible investment strategies in the NAC, Gaurab said that long short funds and inverse ETF are two categories of schemes allowed in the NAC. While long short schemes allow investors to short assets that they don’t hold, inverse ETFs are ETFs where an investor bets against a benchmark index. He added that over the long run, if NAC doesn’t give a wide range of differentiated products, it will fall flat. He also believes that due to the growth of the economy and the market, the ticket sizes of all products will go up. 

NAC can also give good investment options to family offices and corporate treasuries who find the present MF structure limiting in terms of investment opportunities. In the long run, Cat III AIFs may not be present as all such schemes may go to NAC. AMCs can provide structures which are well guarded but outside the MF structure.

When asked about whether the NAC can become restrictive due to mutual fund-like regulations, Ruchi points that the timing of the introduction of the new asset class could not have been better. She believes that inflation is expected to see a declining trend in the next few years. So, investors will have to align their return expectations accordingly. Active management structures can succeed at this time. NAC can bridge investors who want more from mutual funds. NAC can open new opportunities in sector classification and asset allocation.   

Opportunities for distributors    
Saugata believes that NAC will be a standalone category and won’t be in competition with AIF and PMS. He also said that the NAC will be very useful for distributors and RIAs who will get a chance to increase their knowledge base and be more valuable to their clients. 

Besides this, he also feels that the NISM certification will have to change to align with the NAC. 

Tax benefits

While talking about taxation in the NAC, Akhil said that if NAC doesn’t have any tax on portfolio churn like mutual fund, then it would have an added advantage over PMS and AIF. He also believes that if allowed adequate options to introduce schemes, the NAC can encourage PMS providers to move towards it. 

Ticket size

When asked whether NAC may give options to UHNIs to diversify across large number of schemes due to its lower ticket size, Ruchi said that NAC’s ticket size is just an entry barrier to make sure retail investors do not put all their savings in the product.  In order to attract HNIs, it will need to offer quality investment options.