MF and PMS

At a recent meet, SEBI chair had spoken about an intermediate product that will be positioned somewhere between the mutual fund and PMS scheme. What can this product be and what kind of a void can such a product hope to fulfill.

Mutual funds versus PMS

These two products actually represent the two extremes of directed investing. The mutual funds are a retail product where a SIP with as little of Rs500 a month can start off the journey. Mutual funds have a big role to play as they are the key to channelizing the savings of the large mass of Indians and bringing them into the equity markets and also to the debt markets. Mutual funds are also an important instrument for people to plan their financial goals and dreams over the long term and achieve it.

Portfolio Management Service (PMS) is a lot more personalized. It can either be discretionary or non-discretionary; and that means the PMS will either be an advisor or a fund manager based on the choice. However, the minimum cut-off is relatively higher at around 20-25 lakhs, although in many cases the PMS player is even willing to go to Rs10 lakhs to get a larger wallet share of mass affluent investors in India. SEBI is of the view that between the person who does SIPs on mutual funds and the person who opts for a PMS, there is a huge gap in the market, that can be easily tapped if a unique product is available to boot.

What is the mid-path product

SEBI has not spoken much about what it intends to launch as an intermediate positioned product, but it is most likely to be a passive product. Today, mutual funds and PMS operate largely in a similar manner, except that the PMS also uses derivatives extensively to give a let up to returns. Today, the need of the hour is a product not regulated as stringently as a mutual fund, but gives the fund manager enough leeway to look aggressive for alpha. Pure passive fund have been around for a long time but what could come is the likes of Beta Plus funds where the fund are passive but also look at market outperformance.

It will stir up innovation

The SEBI chair is right in the sense that there is a huge gap between an investor in a mutual fund and the investor in a PMS. Because of the absence of any worthwhile product between these two, a gap in investment solutions is being left unfilled. The intermediate product can either be Beta Plus index funds or it can also be more innovative types of funds that are allowed to use leverage in the market and also use market short strategies to enhance returns. There is a huge market for that and as the income levels in India grow rapidly, the need of the hour is to have a product that fills this gap. It would be a good start, that gives more options to the investor and also taps a vast untapped market!