SEBI proposes new high-risk mutual funds for affluent investors: Report

The Securities and Exchange Board of India (SEBI) has reached out to the Association of Mutual Funds in India (AMFI) to gather the opinions of individual Asset Management Companies (AMCs) regarding a proposed new mutual fund category, according to an exclusive report by Mint.

This category is intended to cater to investors with a high tolerance for risk and will feature a higher minimum investment requirement. It will also have more relaxed regulations aimed at generating higher returns.

Relaxing Regulations for High Returns

The report further adds that this proposed category might include investments in junk bonds or long-short strategies. Currently, high-risk investment strategies are typically offered through Portfolio Management Services (PMS) but often require a minimum investment of ₹50 lakh. The suggestion is to make these high-risk strategies available within mutual funds at a lower entry threshold, although higher than that of regular mutual funds.

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SEBI has requested AMFI to collect feedback from the mutual fund industry by October 25th. Specifically, they are seeking suggestions on the regulatory framework for this new category and the minimum investment size.

Compared to PMS, mutual funds are subject to more stringent risk controls, such as a 10% cap on exposure to individual stocks. This means PMS can take concentrated positions in a few companies, while Alternative Investment Funds (AIFs) have more flexibility to employ leverage and long-short strategies. Mutual funds, on the other hand, are not permitted to take "naked short" positions but can use derivatives as a hedge.

Comparing Risk Controls: Mutual Funds, PMS, and AIFs

Mutual funds also offer tax advantages for high-risk strategies compared to PMS. Investors in PMS are subject to taxes when the portfolio generates profits, whereas mutual fund investors are only taxed when they redeem their fund units. This makes mutual funds a more tax-efficient option for investors seeking high returns.