Mutual Funds: Is it wise to invest in NAC after SEBI approval and AMC launches?

The regulator SEBI may soon allow a new and interesting product class. While still under discussion, it has been proposed to introduce a new offering, currently referred to as NAC (New Asset Class) or as investment strategies.

This product will aim to provide more flexibility than regular mutual funds, but will have a lower minimum ticket size than a PMS or AIF. So, it is kind of like that the regulator wants to provide a differentiated product to bridge the opportunity gap between mutual funds and PMS. Since flexibilities will be more, the product, by nature, is expected to offer higher risk-taking strategies within a regulated framework.

This will be introduced under a structure similar to the concept of pooled money like in MFs. But NAC will neither be a mutual fund nor a PMS. It will have a minimum ticket size of ₹10 lakh per investor. For comparison, PMS has a minimum requirement of ₹50 lakh and AIF has a ticket size of ₹1 crore. Mutual funds, as you already know, allow one to invest even just ₹1000 also (some allow even smaller amounts).

This ₹10 lakh threshold is expected to attract investors who have an investible surplus in the range of ₹10-50 lakh. Also, it will open doors for those who wanted to get into PMS but did not have the full ₹50 lakh entry amount. So, let’s say if someone had ₹30 lakh then they will now have an option other than mutual funds. They can decide to split the R 30 lakh amount across 3 new strategies (or NAC) and invest.

What are the other important features of the product?

• The minimum investment size is ₹10 lakh and it will also allow transactions like SIPs etc.
• Interestingly and Unlike MF/PMS which are not allowed to, this new product will be allowed to use derivatives for non-hedging too. Examples include long-short funds or inverse ETFs. As per the regulator, this will provide more flexibility and risk-taking in investments and potentially generate higher returns for its investors.
• The product can only be offered by AMCs or fund houses who have a track record of at least 3 years and an average AUM of ₹10,000 crore in the preceding 3 years. There is some relaxation for newer/smaller fund houses. Those AMCs having a CIO with 10 years of experience in managing ₹5000 crore and an additional fund manager for the NAC with a minimum experience of 7  years with AUM of ₹3000 crore can also launch NAC schemes.
• NAC will also be more flexible than mutual funds - the single issuer limit is 20% of NAV as against 10% of NAV in MF, and can invest 12% of NAV in A and below rated debt securities (such a limit is 6% in MFs) and 20% of NAV can be invested in REITs (10% of NAV in MFs)
• Too early to say but given that it will be more tax-efficient and lower cost than a PMS/AIF (and like MFs), it may be of interest to many who wanted to explore PMS strategies but didn’t have ₹50 lakh and/or didn’t like tax headaches of PMS/AMF.

So why did SEBI feel there was a need for such a new product?

The regulator has justified that - “Over the years, a notable opportunity of a new asset class has emerged between mutual funds and PMS in terms of flexibility in portfolio construction. The absence of such an investment product appears to have inadvertently propelled the investors of this segment towards unregistered and unauthorised investment schemes/entities. Therefore, a new asset class would provide a regulated and structured investment suited to the investors in this segment.”

Also in my view, a product like this will help widen the field to some extent and also deepen the markets as it will now allow the AMCs to participate in derivatives actively and not just for hedging.

That said, is this a good move for the investors?

Should they invest in NACs if and when SEBI approves the concept and AMCs start launching the product?

Too early to say as it is still in the consultation phase and hence, the final product may have different features. But nevertheless, it will definitely allow AMCs to try new approaches, as well as the investors to gain access to a newer set of strategies which aren’t available via the mutual fund route currently.

That is not to say that MFs aren’t good. In fact, I still believe, and strongly so, that mutual funds remain the best vehicle to invest in equity markets for most common investors. Investing in mutual funds in a disciplined manner via regular monthly SIP remains the best bet to participate in the equity market’s potential to create long-term wealth.

But NAC’s unique mandate will allow new approaches to be tried out and it will allow mature higher-risk profile investors to express specific views on the market via this route and generate different investment outcomes.

Dev Ashish is a Sebi-registered investment adviser and the founder of Stable Investor.