Retail Schemes: A Comprehensive Overview on Investment Opportunities

Retail Schemes are special types of investment plans introduced by registered Fund Management Entities (FMEs). These schemes aim at creating a pool of investments from all the participating investors or selected groups through an offer document. The primary intent of Retail Schemes is to enable collective investments in various permissible opportunities in alignment with its predefined investment objective.

Launching a Retail Scheme: The Process

FMEs bear the responsibility of kickstarting Retail Schemes. They initiate the process by filing a draft offer document endorsed by the fiduciaries with the Authority. They must ensure that they submit the document accompanied by the applicable fees a minimum of twenty-one (21) working days before the scheme’s proposed launch. The onus is on the responsible FME to integrate all comments and suggestions from the Authority into the offer document before the scheme’s official launch.

Legal Structures for Retail Schemes

For setting up a Retail Scheme within the International Financial Services Centre (IFSC), the permissible legal forms are either as a Company or a Trust.

Open-Ended and Close-Ended Retail Schemes

FMEs have the flexibility of launching Retail Schemes as either open-ended or close-ended investment plans. For close-ended schemes, FMEs must predetermine the maximum tenure of the investment and disclose this upfront in the offer document. This close-ended scheme should have a tenure of at least 3 years.

If required, there’s room for an extension up to 2 years for the tenure of closed-ended schemes. However, this requires the approval of 2/3rd (Two-thirds) of the investors based on their investment value in the Retail Scheme and also the approval from the Authority.

Minimum Investor Requirement for Retail Schemes

To consider a Retail Scheme as compliant with IFSC guidelines, no less than 20 investors must participate in it. Additionally, FMEs must ensure that no individual investor extends their resources to hold more than 25% of the total investment in a single scheme. They have a maximum time limit of six (6) months from the closure of the offer to meet this condition.

Corpus Requirement for Retail Schemes

All Retail Schemes must maintain a minimum corpus of USD 5 million. However, there is no prescribed limitation on the maximum corpus these investment schemes can accumulate.

Investment Restrictions in Retail Schemes

Irrespective of their type, Retail Schemes must comply with certain investment restrictions as per the guidelines. These include:

• A maximum of 15% of the Retail Scheme’s total Assets Under Management (AUM) can be invested in unlisted securities. For close-ended schemes, this can extend beyond 15% but should not exceed 50% of the total AUM. However, these are subject to a minimum investment size of USD 10,000 from each investor.
• A Retail Scheme cannot allocate more than 10% of its AUM in the securities of a single company. The only exception to this rule is if it receives prior approval from the fiduciaries or if it is an Index Scheme.
• Retail Schemes must not invest more than 25% of their AUM in its associates.
• No more than 25% of a Retail Scheme’s AUM should be invested in a single sector, excluding the financial services sector. If investment in the financial services sector is floated by the Retail Scheme, this should not exceed 50% of the scheme’s AUM. However, these limitations don’t apply to sectoral/ thematic/Index schemes.

Borrowing and Leveraging Activities in Retail Schemes

Retail Schemes can borrow resources to meet temporary liquidity setbacks for redemptions, but exceptions are rare. The borrowing limit can be up to a maximum of 20% of the AUM of the scheme, and the duration of the borrowing must not extend beyond 6 months.

Third-Party Validation of Retail Scheme Assets

Retail Scheme assets must to be valued by an IFSCA-registered third-party service provider, such as a fund administrator, custodian, or a valuer registered with Insolvency and Bankruptcy Board of India. This ensures transparency and accuracy in the valuation process.

Computing Frequency of Retail Scheme’s NAV

The Net Asset Value (NAV) of an open-ended Retail Scheme must be computed daily, while the NAV of a close-ended Retail Scheme must be computed weekly at the very least.

FME’s Minimum Contribution to Retail Schemes

In the context of a Retail Scheme, a FME must invest a minimum of either 1% of the AUM of the scheme or USD 200,000, depending on which is lower.

Mandatory FME Contribution in Retail Schemes

Unless the Retail Scheme is a relocated setup from outside India to IFSC, or the scheme is a fund of fund scheme investing in a scheme with similar requirements, a FME’s contribution to a Retail Scheme is mandatory. The contribution must come into effect within 45 days from the scheme’s launch and should be maintained consistently.

Retail Schemes offer a unique opportunity for investors willing to pool resources for common investment objectives. By accurately understanding the dynamics involved, both FMEs and investors can maximize the potential benefits. These dynamic investment plans cater specifically to individual investment capabilities, and by preferentially streamlining choices, retail schemes ensure a significant return on investment.

Expenses Applicable to Retail Schemes

Investors considering Retail Schemes as a potential investment avenue should also consider the costs associated with them. The expenses of the Schemes are to be borne by the Schemes themselves. While these expenses are outlined in the offer documents, they may include the remuneration for services that assist in managing the scheme, marketing and selling costs, brokerage and transaction costs, etc.

Risk Factors and Investment Performance

Like all investment opportunities, Retail Schemes also carry degree of risk associated with them. These risks can be minimized through research and strategic decision-making. It’s crucial to study and understand past and projected performance of the scheme, market trends, and the broader economic environment.

Investor Rights and Obligations

As an investor in a Retail Scheme, you hold certain rights and obligations. These may include the right to receive regular updates on the value of your investments, the right to transfer your units, and the right to information about the investments made by the scheme. Your obligations may include complying with legal requirements, properly completing and updating your identity documents, and providing necessary documents or evidence when required.

Regulatory Compliance and Retail Schemes

Every Retail Schemes has to follow guidelines set by the relevant financial authorities. The FMEs are responsible for ensuring that their retail schemes are compliant with all these regulations. Any violation of these regulations could lead to penalties and may affect the performance and operation of the scheme.

Understanding the Market Depth and Current Scenario

Before participating in a Retail Scheme, it is crucial to understand the market depth and the current scenario of the sector the scheme is investing in. This understanding helps in planning long-term strategies and coping with market fluctuations.

Transparency features in Retail Schemes

Retail Schemes come with certain transparency features such as timely disclosure of NAVs, portfolio disclosures, and periodic disclosures of material developments shaping up in the scheme. These timely updates help in maintaining visibility of the scheme’s performance to the retail investors.

Investment Approach in Retail Schemes

Retail Schemes work on the principle of pooling resources from retail investors to invest in permissible investments. Therefore, understanding the underlying investment strategy and approach can help investors make informed decisions.

Dividend Policy of Retail Schemes

Investors should understand the dividend policy of Retail Schemes before investing. It is crucial to be aware whether the dividends are reinvested or paid out, or if it’s a growth scheme where the profits are compounded back into the scheme.

Investing in Retail Schemes offers plenty of potential for wealth creation and financial growth. However, due to their complex nature, investors must undertake thorough due diligence and adopt a risk-appropriate portfolio approach. By adhering to these principles, retail investors can realise substantial returns through these unique and innovative investment opportunities.