Specialized Investment Funds (SIFs), introduced by the Securities and Exchange Board of India (Sebi) earlier this year, mark the arrival of a new product category. Unlike traditional mutual funds that can only take long positions (i.e. buy and hold stocks expecting prices to rise), SIFs give fund managers the flexibility to also profit from a decline in stock prices.
So far, three asset management companies—Edelweiss, Quant, and SBI—have launched their first set of SIFs.
How it works
SIFs can invest in both long and short strategies. Unlike traditional mutual funds that thrive mainly when markets rise, SIFs aren’t tied to one direction. They can capture opportunities in a bull market, but also generate returns during bearish phases or when markets are flat and range-bound.
“SIFs are aimed at optimizing portfolio returns and reduce the risk at the same time,” said Bhavesh Jain, co-head of factor investing, Edelweiss AMC.
To achieve this, SIFs rely on the equity derivatives market, which includes futures and options (F&O) instruments. These allow traders to take both long and short positions on a stock—betting on whether its price will rise or fall—and make money if they’re right. This means that even when markets decline, SIFs can still try to profit by taking the right positions.
Gaining from a downside
Using derivative strategies such as the covered call or short strangle, fund managers can pocket profits during market cycles that are unlikely to see big gains or remain range-bound.
For instance, if a fund manager believes a stock will remain steady, they might use a covered call strategy. In this approach, the fund continues to hold the shares but sells a call option with a strike price slightly above the current stock price. The fund pockets the extra income from the option premium—the price of the option contract—which becomes worthless at expiry if the stock price doesn’t match the strike price. In this case, the premium turns into the fund manager’s profit. The strategy can incur losses if the stock rallies sharply, but in a flat or mildly rising market, it typically performs well.
In a short strangle strategy, suppose a company’s stock is at ₹3,060. A SIF manager believes the price will not move sharply during the month. They could sell a call option at ₹3,120 and a put option at ₹3,000. As long as the stock stays between these levels at expiry, both options expire worthless, and the fund pockets the premiums as profit.
If such short positions are created without holding the underlying stock, they’re called naked or unhedged short positions. SIF rules allow up to 25% of the portfolio to be allocated this way.
“There are risks to derivative strategies if these are not managed properly. Theoretically, if there is a sharp swing in a stock’s price and the position isn’t squared off in time, the option seller can see significant losses,” said an F&O expert who requested anonymity.
“Fund managers with the required skill set and experience in the derivatives market should be able to manage these risks,” said Joseph Thomas, chief executive officer of Emkay Wealth Management.
Unlike mutual funds, where investors can redeem units anytime, SIFs offer limited redemption windows—daily for equity SIFs, twice a week for hybrid SIFs, and once a week for debt SIFs. Investors seeking instant liquidity may therefore find them less flexible.
These restrictions, however, allow SIF managers to execute derivative strategies without having to unwind positions to meet sudden withdrawals.
Thomas said such constraints are reasonable as an investor committing a larger sum to a strategy is expected to stay invested. “Such restrictions are common in the AIF space. Even in PMS-es, higher exit loads are charged to discourage early redemption by the investor,” he said.
Return expectations
Returns from SIFs depend on the category of fund—broadly, equity long-short, hybrid long-short, and debt long-short SIFs. The first batch of funds launched so far are largely in the hybrid space; only Quant AMC has introduced an equity long-short SIF.
Hybrid long-short SIFs invest in equities, debt, and equity derivatives. According to a rolling return analysis by Altiva SIF (Edelweiss AMC’s SIF brand), its hybrid SIF strategy has delivered 2-3% higher returns than its own arbitrage fund, a conservative category.
Over a two-year period from 30 June 2021 to 31 August 2025, the average two-year return for the long-short strategy was 10.1%, compared with 6.6% for the arbitrage fund.
“Hybrid SIFs can be viewed as cousins of the hybrid fund category within the mutual fund universe — which already includes arbitrage funds, equity savings schemes and balanced funds. The difference is that SIFs bring more tools, such as the ability to take short positions and deploy advanced derivative strategies to optimize portfolio returns. Hence, return expectations should be aligned accordingly,” said Dharmendra Jain, co-founder, Ionic Wealth.
He noted that SIFs may underperform long-only mutual funds in a strong bull market, since part of the portfolio could be tied up in short positions meant to cushion potential downside. “SIFs are a good balance to a traditional mutual fund portfolio as they offer better risk-adjusted returns over longer periods,” Jain said.
“It is difficult to predict returns of a particular SIF because each SIF will have its own investment strategy…But broadly investors should not look at SIFs to chase high returns,” said Joseph of Emkay Wealth. “For instance, an equity SIF may offer 150–200 basis points higher return than a Nifty-benchmarked passive strategy, as only 25% of the portfolio can be exposed to derivatives to enhance returns.”
Sandeep Tandon, founder and chief investment officer of Quant AMC, said their hybrid SIF aims to offer “the experience of a balanced advantage fund along with a long-short strategy,” while their equity SIF mimics a “flexicap along with a long-short strategy.”
However, Tandon cautioned that SIFs may underperform in a raging bull market. While that may not be the case right now. “In the difficult phase of a bull run, like the one we are going through now, a well-executed SIF strategy should do well,” he said.
Ultimately, much depends on the fund manager’s skill. “Is the fund manager going very aggressive on the shorting strategy or being conservative because shorting is a bit tricky,” Tandon said.
“SIFs in general are aimed at offering better risk-adjusted returns by bringing down the volatility of the portfolio,” Joseph said.
Taxation
SIFs are taxed like mutual funds.
A SIF with equity exposure of 65% (including equity derivatives) will be taxed at 12.5% long-term capital gains tax rate after one year holding period. Gains up to ₹1.25 lakh will be tax-exempt. Gains from less than one-year holding will be taxed as short-term capital gains at 20%.
SIF holding 35-65% equity (including equity derivatives) will be taxed at 12.5% long-term capital gains tax rate after two years. Gains from less than two-year holding will be taxed as short-term capital gains at the investor’s slab rate.
Debt oriented SIFs with 65% or more exposure to debt instruments will be taxed at investor’s slab rate, regardless of the holding period. No debt SIFs have been launched yet.
What should investors do
SIFs are sophisticated investment products meant to reduce volatility using derivatives.
Financial planners suggest that investors should consider them only after building a solid core portfolio through equity and debt mutual funds.
“It is meant for investors who have several years of experience and understand equity and debt markets well. Only investors who understand how derivatives markets work should get into SIFs,” said Vivek Rege, founder and CEO of VR Wealth Advisors. “Short positions can protect the portfolio against volatility, but only to an extent as such exposure is capped up to 25% of the portfolio.”
Earlier, long-short strategies were available mainly through alternate investment funds (AIFs), which cater to high net-worth individuals with a ₹1 crore minimum ticket size. SIFs, with a ₹10 lakh minimum investment, open access to such strategies for a wider investor base.
They also offer additional benefits: a capped expense ratio of 2.25%, no performance fee, and mutual-fund-like taxation.
“Investors should be mindful of the lack of a track record in the SIF space, so they may wish to start with smaller allocations,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
“For a core long-term portfolio, regular mutual funds offer plenty of options. Investors should view SIFs as tactical products that can be part of an investor’s satellite portfolio,” Rege added.
Before considering an SIF, check whether the management team has the necessary skills and experience in the derivatives market. When used correctly, derivatives can help manage market volatility and even boost portfolio returns, but if mishandled, they can lead to losses.