On Thursday, the Securities and Exchange Board of India (SEBI) released the final framework for the new asset class, formally known as the Specialized Investment Fund (SIF). The regulator had originally presented the idea of a new asset class in a consultation paper in July 2024.
Here is all you need to know about the final framework for the specialised investment fund (SIF).
What is the Specialized Investment Fund (SIF)?
The Specialized Investment Fund (SIF) is a new category of investment product introduced by SEBI to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS). The regulator believes that while over the years, India’s financial market has witnessed an expansion in investment products with varying degrees of risk, complexity, and regulatory oversight, a gap exists between mutual funds and PMS. SIFs aim to provide a middle ground, offering portfolio flexibility while ensuring regulatory compliance and investor protection.
When will it be implemented?
This framework has been introduced through amendments to the SEBI (Mutual Funds) Regulations, 1996, and will be effective from April 1. Additional operational guidelines from the Association of Mutual Funds in India (AMFI) are expected by March 31.
How are Specialized Investment Funds different from mutual funds and PMS?
The difference between these investment options lies in the level of regulatory oversight, investment flexibility, and investor eligibility requirements. According to the regulator, SIFs are designed to offer investors both flexibility and regulatory safeguards.
How can an asset management company (AMC) establish an SIF?
SEBI has outlined two routes through which an AMC can establish an SIF. The first is if the AMC has been operational for at least three years, it must have average Assets Under Management (AUM) of Rs 10,000 crore or more over the last three years. The alternate route is that the AMC must appoint a Chief Investment Officer (CIO) with at least 10 years of experience managing an AUM of Rs 5,000 crore or more. The framework also notes that an additional fund manager must have at least three years of experience managing an AUM of Rs 500 crore.
What investment strategies can SIFs offer?
SEBI allows SIFs to offer three categories of investment strategies: the first is Equity-Oriented Strategies such as Equity Long-Short Funds and Sector Rotation Funds. The second is Debt-Oriented Strategies like Debt Long-Short Funds and Sectoral Debt Funds. The third category is hybrid Strategies including Active Asset Allocator Funds and Hybrid Long-Short Funds.
Equity-Oriented Strategies focus on equity and derivatives, allowing limited short exposure. The Equity Long-Short Fund invests at least 80% in equities with a 25% short limit. The Equity Ex-Top 100 Long-Short Fund excludes large-cap stocks while maintaining 65% equity exposure. The Sector Rotation Long-Short Fund concentrates on a maximum of four sectors.
Debt-Oriented Strategies invest in fixed-income securities. The Debt Long-Short Fund allows exposure across durations, while the Sectoral Debt Long-Short Fund focuses on two or more sectors, limiting exposure to 75% per sector.
Hybrid Strategies combine multiple asset classes. The Active Asset Allocator Long-Short Fund dynamically allocates investments across equity, debt, REITs, and commodities. The Hybrid Long-Short Fund requires a minimum 25% investment in both equity and debt.
The current framework allows only one strategy per category per SIF.
What is the investment threshold?
The minimum investment requirement is Rs 10 lakh per investor across all investment strategies (except for accredited investors) and if an investor’s total investment falls below Rs 10 lakh due to redemption, they must redeem the entire remaining investment. The circular notes that while Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP) are allowed, they must also comply with the Rs 10 lakh minimum threshold.
Are there any restrictions?
There is a cap on debt and money market securities exposure per issuer, i.e 20 percent if AAA-rated, 16 percent if AA-rated, 12 percent if A-rated or below. The circular states that a 5 percent extension is possible with trustee approval. Additionally, there is a sectoral exposure cap of 25 percent of Net Asset Value (NAV) for debt investments.
How do SIFs handle derivatives investments?
SIFs can take unhedged short positions in derivatives up to 25 percent of their net assets. The calculation method follows existing mutual fund derivative exposure guidelines. The circular states that offsetting of derivatives positions is permitted only if they are on the same underlying security with the same expiry date.
How do investors subscribe to and redeem their SIF investments?
SIFs can have flexible subscription and redemption frequencies, such as daily, weekly, monthly, or fixed maturity-based redemptions. The redemption process may include a notice period of up to 15 working days, allowing fund managers to manage liquidity effectively. The circular adds that for closed-ended and interval investment strategies, SEBI mandates that all such SIFs be listed on a recognised stock exchange to provide an additional liquidity option for investors.
How are SIFs benchmarked and what disclosures are required?
Each SIF strategy must follow a single-tier benchmark system using widely recognised market indices such as Nifty 500 or BSE Sensex for equity strategies, and appropriate bond indices for debt strategies. A second-tier benchmark is optional. SEBI also mandates comprehensive disclosure requirements, including portfolio details every two months, scenario analysis in offer documents, depicting potential losses, standard disclaimer on advertisements, warning about SIF risks etc. Similar to mutual fund's riskometer, SIFs need to implement a risk band system, which must be updated regularly.
Who can distribute SIFs?
Distributors and other authorised entities for mutual funds are allowed to offer products under the SIF as long as they have passed National Institute of Securities Markets (‘NISM’) Series-XIII: Common Derivatives Certification Examination. The circular notes that AMFI and the AMCs shall ensure compliance with the above requirement by their agents and distributors.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
