Wealth management in India: SEBI’s bottom-up approach to investment

The Securities and Exchange Board of India’s (SEBI) decision to introduce a new asset class within the mutual fund framework represents a transformative moment for India’s wealth management sector. The new asset class offers a range of investment strategies that act like hedge funds. While the Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) require a minimum investment of INR5 million (USD58,900) and INR10 million, respectively, the SEBI has a much more accessible entry point of INR1 million for the new asset class.

The SEBI believes that the investment landscape in India has changed dramatically in the past few years, necessitating a product that meets the needs of a new set of investors. The introduction of this asset class offers greater flexibility in portfolio management than is traditionally available in mutual funds. For instance, these products will include strategies such as long-short equity funds, which allow investors to profit from both rising and falling markets. Similarly, inverse exchange traded funds (ETFs) offer the potential for gains when markets or indices decline. These advanced tools allow investors to mitigate risk and enhance returns, particularly during volatile market conditions.

An essential objective of this new asset class is also to safeguard investors from unregistered and unauthorised schemes that often promise high returns without regulatory oversight. Such schemes have previously caused significant financial losses for unsuspecting investors. By offering a regulated, professionally managed product, the SEBI is not only providing investors with a legitimate avenue for higher-risk strategies, but also protecting them from the pitfalls of unregulated markets. The new asset class aims to provide built-in safeguards, such as limits on leverage, capped derivative exposure at 25%, and restrictions on unlisted securities.

While the SEBI framework for the new asset class is promising, challenges related to performance and return on investment remain. In global markets, similar products have often struggled to deliver high returns, primarily due to higher management costs and the inherent complexity of consistently outperforming traditional benchmarks.

However, the SEBI’s introduction is tailored to India’s context, where the rise in financial literacy, combined with a growing middle class, presents significant opportunities. As this new asset class is yet to be formally rolled out, it will be interesting to observe how Indian markets react, and whether these investment strategies are able to thrive.

The SEBI’s introduction of this new asset class comes at a time of rising retail participation in the stock market. The growth of financial literacy, coupled with the increasing availability of digital investment platforms, has created an environment where more investors are looking to diversify their portfolios. This new asset class is likely to foster a more inclusive wealth management landscape, where retail investors are empowered to take on more risk in a regulated, transparent and safe way.

A key pillar of the SEBI’s approach to these new products is its focus on investor education. Through programmes like the Securities Market Trainers (SMARTs) initiative, the SEBI has been equipping investors with the knowledge to make informed decisions. This commitment to investor education is further strengthened through its collaboration with exchanges, depositories and investor associations, ensuring that financial literacy reaches even remote regions. This emphasis on education reflects the SEBI’s understanding that giving investors access to complex products is only part of the equation; equipping them with the skills to navigate these products responsibly is equally important.

Traditionally, access to complex strategies has been limited to high-net-worth individuals, but the SEBI’s new asset class makes such tools available within the mutual fund framework. This democratisation of investment products not only empowers retail investors to engage with diversified strategies, but also pushes fund managers to innovate and cater to a wider audience.

This shift could also encourage financial institutions to continually refine their products, driving a more mature and comprehensive wealth management landscape over time. With continued emphasis on investor education and innovation in product development, and by allowing for greater flexibility and risk-taking, the SEBI’s approach promises to lead to a more inclusive and dynamic wealth management ecosystem.

Inder Mohan Singh is a partner, Suraj Meher is a principal associate and Shaurya Jakher is an associate at Shardul Amarchand Mangaldas & Co.