Letters to the Editor's Note

Dhirendra Kumar's Editor's Note on the creation of a new type of mutual fund known as 'investment strategy', published on October 19, received considerable feedback from readers. The thoughtful responses reflected a strong engagement with the topic. As a gesture of appreciation, we dedicate this section to our valued readers, whose insights help enrich these discussions.

Summary

When asked my opinion on this new mutual fund type, I replied, "Come back after three years, and I'll tell you what I think." This isn't a joke - it might take five years to form a well-reasoned opinion. Let's step back to understand this better.

SEBI (Securities and Exchange Board of India) recently introduced a new mutual fund category termed 'investment strategy.' While vague in name, it essentially represents a higher risk and higher return variant of traditional mutual funds, sitting between existing schemes and PMS (Portfolio Management Services). Aimed at investors with significant capital, it requires a minimum investment of Rs 10 lakh, much higher than most equity funds but lower than the Rs 50 lakh threshold for PMS. This positions the product for those who can take on more risk but seek an alternative to the higher-entry PMS.

The key motive behind this new category seems preventive. SEBI hopes to deter unregistered, high-risk investment schemes by offering a regulated, professional option within the mutual fund framework. This product could channel investments away from risky, unregulated options.

While these 'investment strategies' allow greater portfolio flexibility, SEBI has implemented safeguards to control risks. Restrictions include prohibitions on leverage, limits on unlisted and unrated instruments and caps on derivatives exposure, ensuring these funds don't stray into overly speculative areas.

This product will likely have mixed perceptions among investors. For mutual fund investors, it's marketed as a high-risk, high-return option for those who can handle it. For PMS investors, it's presented as a more transparent, tax-efficient and regulated alternative to PMS, potentially disrupting the PMS market.

However, the details are still minimal - just a few lines in a SEBI release. With many AMCs (asset management companies) involved in PMS, it's uncertain if they'll fully support a product that could impact their own business. It will take at least three years to see if these funds deliver real value, but they could provide a beneficial choice for certain investors.

What our readers say

Thank you for your frank and insightful inputs on the new class of mutual fund product announced by SEBI. I agree with your advice that it is necessary to wait to form an opinion on this new class of investment product based on its actual performance.

I am not a proponent of PMS. In fact, I moved away from PMS as soon as I realised that its objective was to maximise the revenue of the fund houses offering it. In that sense, I welcome the new class of 'investment strategy' product as that will be better regulated and transparent. In any case, I would like to try out the new class of investment product - Premnath Rai

The explanation for this new product is commendable. As an investor without knowing the preemptive measures, we are naturally tempted to invest, but after reading your article, I have some clarity and clues about the product - A Prasad

You guys do a great job in an industry marred by unverifiable sources bombarding us with spurious news and so-called expert opinions. Please continue being honest. As for the PMS replacement mutual fund, while time will tell its effectiveness, I'm sure there will be a market player who will see the need gap and be the first mover. So, I would love to see an article that scans AMCs making such offerings. Thanks for being the voice of sanity in the mad bull run - Devika Jadhav

Thank you very much for providing information on this new product; otherwise, it would have gone unnoticed in this self-boasting and systematic propagandising era of AMCs.

SEBI's initiative seems like a ray of hope for retail investors who are unable to enter the opaque world of PMS with all their hype. Please come with more and more retail investor-friendly hand-holding advice.

Thank you very much once again. God bless - Fakkeerappa Duragannavar

One day, I was also asking my financial consultant about the new AIF approved by SEBI, and whether I should take the plunge.

My consultant said that it may come into the market only in the next financial year, and then we shall discuss it. In the meantime, your analysis seems logical. As an avid supporter and investor of conventional mutual funds, I am optimistic about the new offerings - S Chakraborty

Wondering what we would do without your informative articles laced with high-degree professional insights. Thanks - Sushil Sachdeva

Your editorial note on a new type of mutual fund dated October 19 is really enlightening and interesting. As you have written, it will take a few years to see how these funds perform vis-a-vis PMS - Nityananda Dash

I totally agree with your point. The true colour will emerge only after a gestation period of the three-year timeline - Ashok Mahajan

A very suggestive and useful piece of information. Please carry on, Dhiren - Dr Jitendra

A good article providing clarity. Not overstating or understating the importance/possibility of the outcomes.

Some of the AMCs who don't have a big stake in PMS would benefit from accepting the new challenge. But knowing who these AMCs are is not easy.

Not sure if the same could be extended/applied to REITs where some minimum investment is over Rs 30 lakh - Arvind

This article was originally published on November 15, 2024.