Securities and exchange board of India (Sebi) recently proposed a mutual fund-only PMS (MF-PMS) framework recently which can invest in direct plans of mutual funds, exchange-traded funds (ETFs) and specialized investment funds (SIFs). A key part of the proposal includes lowering of the minimum investment threshold from Rs 50 lakh to Rs 25 lakh and reduction of the minimum net-worth requirement of the portfolio manager from Rs 5 crore to Rs 2 crore. Apart from that, the regulator also made the requirements of a dedicated dealing room and additional employees optional while reducing the criteria for principal officer.
This proposal follows concerns expressed by the SEBI Chairman Tuhin Kanta Pandey on the decline in number of registered investment advisers (RIAs) in the country a few months ago. Pandey had also said that the regulator is working to make a more viable, scalable and attractive advisory framework for qualified professional. Experts believe that the newly proposed framework can provide a boost to RIAs and fee-based advisory model in general. DP Singh, Joint CEO, SBI Mutual Fund said that the new framework can increase accountability among distributors for the performance of the investor portfolio and make fee-based advisory model more popular.
Strengthening the Advisory Model
Aditya Agarwal, co-founder of Wealthy.in said that the proposed framework could significantly strengthen the advisory model by shifting the focus from product distribution to customized portfolio construction, asset allocation and ongoing portfolio monitoring. It can enable advisors to offer institutional-quality, goal-based solutions while leveraging the transparency, liquidity and diversification of mutual funds. He believes that if pricing remains competitive and execution is seamless, MF-PMS could emerge as an attractive proposition for affluent investors while accelerating the transition toward fee-based wealth management and professional advisory services.
Sandeep Jethwani, co-founder, Dezerv called the move a watershed for the industry and said it will widen the addressable market for mutual funds. He added that there is a large existing investor base who can invest in the range of Rs 25-50 lakh who cannot take the help of a professional portfolio manager due to the higher minimum investment threshold and thereby spend significant time managing them.
A discretionary MF-only PMS framework can allow a manager to take on that responsibility formally, within a regulated structure. In addition, Jethwani expects simplified operating requirements and a lower net worth threshold to open the MF-PMS framework to a far wider set of registered investment advisers, making it a platform for advisors to significantly scale up and can unlock a new wave of talent into the industry.
Anup Bhaiya, founder, Money Honey Wealth Services said that the regulator’s proposals open PMS to smaller RIAs, boutique advisors and MFDs who are expected to launch MF-PMS offerings and shift clients seeking direct plans to the new framework.
Some experts also expressed optimism about the medium-to long-term effects of the proposals. Jethwani said that the proposals can lead to direct plans making up an even more significant portion of mutual fund inflows in future. He added that this framework gives affluent investors a regulated way to have their portfolios professionally managed while staying entirely within direct plans, which could lead to durable investments over the long-term as more investors stay the course during market downturns. He also expects the proposal to allow international investing and unlisted debt within the main PMS structure to be beneficial to domestic investors looking for international exposure in their portfolios.