Early this year, the Securities and Exchange Board of India (SEBI) introduced a new regulatory framework for Specialised Investment Funds, an investment product that aims to bridge the gap between mutual funds and portfolio management services (PMS). Several asset management companies are now getting ready to launch their SIFs.
While the current range of investment products are intended to meet the needs of retail, high net-worth and institutional investors, over the years a gap has emerged between MFs and PMS in terms of portfolio flexibility, creating an opportunity for a new investment product. SIFs bridge this gap.
Any registered mutual fund can start an SIF. But, there are conditions. The fund house has to be in operation for at least three years and has average assets under management (AUM) of not less than Rs10,000 crore in the immediately preceding three years. Also, no action must have been taken against the sponsor or asset management company (AMC) under certain sections of SEBI Act in the past three years.
An SIF can also be started if the AMC has appointed a chief investment officer for the SIF with fund management experience of at least 10 years and has managed average AUM of not less than Rs5,000 crore. The AMC will also need to appoint an additional fund manager for SIF with fund management experience of at least three years and has managed average AUM of not less than Rs500 crore.
The AMC will have to ensure that the SIF has distinct identification, and brand name and logo, separate from that of the MF. The sponsor’s or mutual fund’s brand name could be used for five years to establish the SIF and in its initial recognition.
SEBI has permitted specific investment strategies for SIFs. For instance, in equity oriented investment strategies, a SIF could have a long/short fund (a fund that takes both long and short positions in investments), where minimum equity investments would have to be 80 per cent, while maximum 25 per cent could be invested in unhedged derivatives. The SIF could also launch ex-top 100 long/short fund where minimum 65 per cent of the investment will have to be in stocks, excluding the top 100 by market capitalisation. In a sector rotation long/short fund, the SIF would have to invest minimum 80 per cent in stocks of maximum four sectors.
Similarly, the regulator has mandated two strategies in the fixed income space—debt long/short fund and sectoral debt long/short fund. In debt strategies, an SIF could have a short exposure through exchange traded debt derivative instruments. SEBI has also allowed two hybrid investment strategies, where dynamic investment would be allowed across equity, debt, derivatives, commodity derivatives and REITs (real estate investment trusts) and InVITs (infrastructure investment trusts).
It must be noted that an investment strategy under an SIF shall not invest more than 20 per cent of its net asset value in AAA rated debt securities issued by a single issuer, 16 per cent if the security is AA rated and 12 per cent in securities rated A or below.
If you want to invest in any SIF scheme, you will have to make an investment of minimum Rs10 lakh. The AMC will have to monitor the compliance with the minimum investment threshold on a daily basis to ensure there are no active breaches. In PMS, you would have to invest minimum Rs50 lakh. “SIFs can offer the convenience of investing and the assurance of regulatory oversight as applicable to MFs with innovation and flexibility of PMS. Investors looking for differentiated strategies at lower entry points can benefit from SIFs,” said Manoj Trivedi, director of strategy at Maxiom Wealth.
What truly sets SIFs apart is their ability to deploy concentrated portfolios, thematic strategies, and, critically, the use of derivatives, which are largely restricted in mutual funds, said Arun Patel, founder and partner at Arunasset Investment Services.
SEBI had released a study last year, which noted that 93 per cent of retail traders lost money in futures and options segment. “By enabling professional fund managers to handle derivative strategies on behalf of investors, SIFs aim to offer a safer, more structured alternative to the high-risk, self-directed trading that typically leads to retail investor losses,” said Patel.
Many asset managers have taken the plunge. Edelweiss Mutual Fund was among the first AMCs to enter this space with its Altiva SIF. “We believe SIFs represent the next evolution in investment solutions—a powerful bridge between traditional mutual funds and PMS/AIFs (alternative investment funds), offering the agility and innovation needed to serve tomorrow’s investors,” said Radhika Gupta, MD and CEO of Edelweiss Mutual Fund.
Korean investment giant Mirae’s Indian asset management arm has entered the market with Platinum SIF. Nippon Life India Asset Management recently appointed Andrew Holland from Avendus Capital to head its planned SIF foray.
SIFs are suited for investors with a relatively higher risk appetite, who prefer performance-based fees and can manage relatively lower liquidity, said Trivedi of Maxiom. “Theoretically, an SIF should be able to generate higher returns than MFs, particularly when volatility is higher, but that need not be necessarily true. Growth of SIF will depend on whether or not they outperform the MFs,” he said.
Amid the attraction of complex strategies and derivatives one can’t forget time-tested principles of buying quality assets, staying invested with discipline, and thus allowing compounding over time. “Investors considering SIFs should approach them with grounded expectations and a clear understanding that there is no magical secret sauce or guaranteed arbitrage to unlock overnight wealth,” said Patel.