Haute floating for the fine investor

Sebi has floated the idea of allowing mutual funds to offer higher-risk products to well-heeled investors. Since these products are already on offer by portfolio management services (PMS) and AIFs, the proposed lower investment cut-offs will allow a larger section of investors access to sophisticated methods of wealth creation now available to HNIs. There is demand for such investment products as witnessed in the growth of unregulated PMS offerings, and Sebi is tailoring oversight of this segment accordingly. Its intermediary of choice for what is being termed a new asset class, with independent branding and regulation, are MFs that have accumulated impressive assets under management in recent years. The products will come with popular systematic investment and withdrawal mechanisms, and risk management will have to be adjusted accordingly.

There can be little to disagree with the notion that Indian investors need a bigger investment buffet menu so long as the higher associated risks are managed professionally. The question arises whether MFs are better placed to do so than PMS and AIF providers. Sebi's preference for established track record weighs the scales in favour of the mutual fund industry - although the playing field may need to be levelled progressively for PMS and AIF players. Since the matter is related to creation of wealth, initial cannibalisation upwards into the bigger-bracket PMS and AIF segments will be the more acceptable solution for a regulator. It also helps to contain risks towards the top of the funnel while arresting its spread to the bottom where adverse outcomes can have an outsized impact on household savings.

An asset class offering higher returns can nudge more household savings into the capital markets and reduce intermediation by banks. This is the direction India must follow for financial evolution that lowers the cost of capital. Scope for creativity in designing thematic investment options makes Sebi's suggestion for a new asset class a compelling one.