SEBI proposes a new asset class for high risk takers amidst growing population of affluent investors, aiming to bring flexibility in portfolio building
Over the last few decades, Indian financial markets have transformed considerably, with many new financial instruments evolving to meet various investor needs. The proposal of Inverse Exchange-Traded Funds (ETFs) by the SEBI in Aug’24 is another important step aiming to bridge the gap between Mutual Funds and portfolio management services (PMS).
Inverse exchange-traded funds (ETFs) attempt to deliver returns opposite to the returns of a particular index or asset class. Inverse exchange-traded funds are constructed, concerning investments in underlying indexes, primarily by utilizing derivatives, such as futures contracts, to create a leveraged inverse exposure position. Inverse exchange-traded funds, in effect, allow an investor to hedge against down markets or even speculate that the price of any asset class will decline, without short selling.
The introduction of Inverse ETFs points out that such instruments can be a part of a diverse investment package, which helps investors take risks in situations when there are high fluctuations in the stock market. The proposal was initiated in response to the increasing need for securitization instruments capable of addressing different market changes, especially with the fluctuations observed in the recent period.
“India is finally opening up to different investment products, styles and approaches. Passive, factor, inverse ETFs, alts and more. There is no single way to invest,” said Radhika Gupta, MD and CEO of Edelweiss Mutual Fund.
The possibility of Inverse ETFs could probably bear several ramifications on the Indian market. The new asset class comes with a higher ticket size and a greater risk-taking capability. A higher threshold of 10 lakhs will dissuade retail investors while providing investment freedom to affluent investors with capabilities to invest between 10 and 50 lakhs.
This proposal, which aims to legitimize high-risk investment techniques, has the potential to stabilize markets by limiting the proliferation of unregistered and unauthorized investment products.
“This new asset class is poised to leverage the exponential growth expected in managed assets (MFs, PMSs and AIFs) in the next 5-7 years”, Dezerv Co-Founder Sandeep Jethwani said.
As with any new financial instrument, such as Inverse ETFs, there is the need to pave the way for the right framework that will be coherent with the market and act as a shield against investors’ exploitation. The functions of SEBI shall entail the regulation by monitoring how these funds and the various products offered are established, promoted, and managed, especially on the derivation of inversely related returns. In this regard, the investors will heavily rely on the level of transparency to understand the risks associated with investing in Inverse ETFs. Inverse ETFs generally depend on derivatives as compared to conventional ETFs that invest in physicals; thus are susceptible to complexity and risks. Further, SEBI must also contemplate barriers against related economic malpractices, such as influencing the prices of these and other related products, which prevented the introduction of these instruments from causing undue speculation and volatility. To build confidence, particularly in the new asset class, proper monitoring and well-defined guidelines on the disclosure of risks will be critical.
ETFs provide investors with another method to create a hedge against down markets without actual short selling. The implementation of Inverse ETFs also has strategic advantages for investors, facilitating their access to bear market trends with reduced risks in volatile environments.
