Brokerages have asked the Securities and Exchange Board of India (Sebi) for relaxing the rules on the so-called basket investment plans they offer. These products currently do not have a regulatory framework and brokerages market these to customers as long-term investment products, on the lines of the systematic investment plans (SIPs) offered by mutual funds (MFs).
However, an issue arises when the broker decides to remove an existing stock or introduce a new one into the basket. In such a scenario, the basket plan would be considered a portfolio management service (PMS) under Sebi rules, subject to several trade restrictions and additional compliance burdens, say brokers.
For instance, consider a basket investment plan comprising three stocks — HDFC Bank, Reliance Industries and Infosys. Assume Infosys has come under selling pressure due to sector-specific issues and a broker wants to replace it with ITC. The moment such a replacement happens, the stock becomes a PMS investment.
Experts say those subscribing to such basket investment products are typically small or mid-size investors, as the minimum to enroll could be as low as Rs 500 a month. However, a PMS is considered an investment gateway for wealthy investors, the minimum size defined as Rs 2.5 million. Hence, if a basket product is considered PMS, investors will have to comply with the minimum size requirement.
Further, the brokerage will no longer be able to sell it through a broking arm, since an intermediary which engages in portfolio services needs a special licence from Sebi.
“We have not been able to capitalise on these products due to the regulatory challenges. Such products provide a win-win situation for broker and client, since we get assured business every month and our clients get to invest in products that give superior returns. In this context, we have asked Sebi to exempt such products from compliance with PMS regulations,” said a broker.
Brokers see much potential in basket investment plans. SIPs offered by MFs are currently getting inflows of Rs 60-70 billion a month. Brokers say basket investment plans offer better flexibility and discretion to an investor vis-à-vis a fund's SIP.
Unlike a mutual fund, these baskets often consist of less than 10 stocks. Since MF rules don’t govern these baskets, a broker does not have to adhere to any exposure limits. Due to this, these have the potential to outperform a regular MF.
Basket investments have attained popularity in the past two years, amid the general up-move in the market. Investors typically identity stocks with good long-term growth potential and spread out their investment, to avoid price volatility. Brokerages offer several incentives on such products.