AMFI receives input as SEBI proposes a new category of mutual funds termed "high-risk."

AMFI receives input as SEBI proposes a new category of mutual funds termed "high-risk."

 SEBI has suggested introducing a new category of mutual funds with high-risk profiles, aiming to prevent small investors from being enticed by risky strategies. In a meeting with the Association of Mutual Funds in India (AMFI), SEBI initially presented this proposal and subsequently sent a letter to AMFI for internal deliberation on the feasibility of such a category. The motive behind this proposal is to address concerns about investors, driven by the desire for higher returns, gravitating towards high-risk Portfolio Management Services or unregistered advisors.

SEBI believes that by launching a high-risk product within the regulated framework of mutual funds, investors would be more likely to stay within the mutual fund realm. The specific investment instruments for this proposed fund have not been specified yet as the matter is still under consultation. However, industry experts suggest that such a scheme might involve investment in momentum stocks (small-cap, mid-cap, micro-cap, and mini-cap stocks), derivative instruments, and high-risk leverage strategies.

While discussions will ensue within the Rs 45-trillion Indian mutual fund industry to shape the nature of this new category, some officials express apprehension. They fear that if these schemes default or suffer significant losses due to their high-risk nature, it could not only impact the reputation of the fund houses but also that of the entire mutual fund industry. They cite the example of credit risk debt funds encountering difficulties during the Covid-19-induced liquidity crisis, which adversely affected the industry's image.

If this new category is approved, SEBI has suggested raising the minimum investment level in order to protect small investors from high-risk methods. Even with this precaution, though, there's no assurance that ordinary investors won't be lured in by unregistered advisors or "Finfluencers" offering large profits through dubious tactics. Even though Portfolio Management Services (PMS) require a larger minimum commitment of Rs 50 lakh, its target market is high net worth individuals who are more risk-aware and knowledgeable. Conversely, investors in mutual funds are made up of smaller investors.