Specialized Investment Fund (SIFs) are emerging as a new category in India’s mutual fund landscape, positioned as a next-generation solution for investors seeking better returns without taking on significant equity risk.
Offering equity-like tax treatment and hedged exposure , Hybrid SIFs are being compared to arbitrage funds, which have long been the preferred low-risk option in mutual funds. But can SIFs truly outperform arbitrage funds while remaining low-risk?
This question was at the centre of a recent panel discussion titled “The SIF Challenge: Product, Potential and Purpose” at Moneycontrol Mutual Fund Summit 2025 with D P Singh, Deputy Managing Director & Joint CEO at SBI Mutual Fund, and Sandeep Tandon, Founder & CIO of Quant Group.
SIF strategy: Equity taxation, lower risk
Designed for sophisticated investors, SIFs provide enhanced portfolio flexibility through strategies such as long–short positions with a minimum investment requirement of Rs 10 lakh and regulatory oversight under SEBI’s mutual fund framework. “We will not keep naked positions more than 10% of the fund,” said Singh. “We are aiming for arbitrage-plus kind of returns initially, and as we gain experience, we will improve performance.”
Contrary to the perception that derivatives are risky, panelists clarified that SIFs use derivatives only for hedging, not speculation.
“Derivatives are misunderstood. They are not instruments of destruction; they are risk control tools,” said Tandon. “SEBI clearly restricts leverage, which ensures disciplined exposure. In next 10 years see it as 40-50 % of the active equity mutual fund."
Return expectations: Arbitrage-plus performance
Arbitrage funds currently deliver 5-6% returns, slightly higher than liquid funds but limited by market spreads. SIFs aim to enhance returns while managing volatility.
“If we are able to give 100 to 200 basis points more than any fixed coupon product, that makes it a good fund,” said Singh.
That combination of low risk with equity taxation makes SIFs appealing to investors seeking predictable outcomes.
Will SIFs replace arbitrage funds?
Despite higher return potential, the panel made it clear that SIFs will not make arbitrage funds obsolete.
“No, this will not kill arbitrage funds,” Singh clarified. “Arbitrage funds give 5–6% today. SIF is designed to give arbitrage-plus returns with equity tax efficiency. Both categories can coexist.”
Arbitrage funds will continue to cater to short-term liquidity seekers, whereas SIFs are meant for disciplined investors with a medium to long-term horizon.
“We already see 20–25% new investors coming through SIFs,” Singh said. “These are people who lost money in direct derivatives and now want risk-managed exposure.”
With disciplined risk control, consistent return potential and equity taxation, SIFs could emerge as a strong alternative to arbitrage funds for conservative investors.
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