Investment risks: Keeping accredited investors safe

A single asset manager would never be able to step forward and highlight underperformance in its schemes, as compared to its peers, a major conflict of interest which retail investors are currently exposed to.

We welcome the long-awaited move by Sebi to come up with accredited investor guidelines. An accredited investor is someone who has qualification and experience to navigate the highly volatile and higher risk bearing asset classes such as equities, real estate as well as structures like derivatives.

As defined by Sebi, accredited investors is a class of investors who have an understanding of various financial products and the risks and returns associated with them and therefore, are able to take informed decisions regarding their investments. Accredited investors are recognised by many securities and financial market regulators around the globe.

Regulatory protection
These investors are considered sophisticated enough to not require extensive regulatory protection. They are allowed certain relaxations given their ability to bear higher market and financial risks.

As per Sebi draft, often prospective investors in the securities market are introduced to these investment products/ services through distributors or friends/ acquaintances. These introducers and/ or distributors may not always be able to sufficiently educate the prospective investor regarding the risk-return profile of the product/ service being marketed or its appropriateness as compared to the financial goals of the prospective investor.

In respect of distributors, there can also potentially be conflict of interest as they are remunerated by commissions earned from products. In order to protect investors from unsuitable investment products in the securities market, one measure is to stipulate a minimum investment threshold for each regulated product/ service. The benefit to investors is portfolio diversification via access to customised investment products,, more investment products due to lower entry barriers such as minimum investment size, customised contractual arrangements with product/ service providers.

Direct plans of MFs
We welcome these well-thought-through guidelines, and would recommend that the existing anomaly of allowing retail investors to access direct plans of mutual funds be abolished immediately, and giving access to direct plans only to accredited investors, which was the original intent behind introduction of direct plans in mutual funds.

Direct plans of mutual funds, after all, are a relaxation of regulatory norms and it is imperative that there is a declaration from the investor to the effect that the investor is aware that being an accredited investor, he is expected to have the necessary knowledge or means to understand the features of the investment product/ service, including the risks associated with the investment and also has the ability to bear the financial risk associated with the investment before being allowed to enter any direct plan of mutual funds.

It is unfathomable to think AMCs would directly have the paraphernalia or the intent to educate direct plan investors regarding the risk-return profile of the product/ service or its appropriateness as compared to the financial goals of the prospective investor. A single asset manager would never be able to step forward and highlight underperformance in its schemes, as compared to its peers, a major conflict of interest which retail investors are currently exposed to.

An accredited investor, on his own, and/ or in conjunction with a good investment advisor would be well-placed to navigate market related risks in direct plans, PMS, AIF and other structures. An accredited investor would be aware that the investment product/ service in which he is proposing to participate may have a relaxed and flexible regulatory framework and may not be subject to the same regulatory oversight as products designed for retail investors.

The writer is chairman & MD, Bajaj Capital