Specialised Investment Funds: A new avenue for investors looking for higher returns with calculated risks

SIFs offer a great opportunity to increase returns to investors who are willing to take a high risk.

From April 1, investors seeking sophisticated avenues for higher returns can invest in Specialised Investment Funds (SIFs), a new category bridging mutual funds and portfolio management services (PMS) with a lower entry point of Rs 10 lakh.

Currently, the bouquet of products offered in the asset management industry includes mutual fund schemes ranging from Rs 100 to PMSes with a ticket size of Rs 50 lakh and Alternative Investment Funds (AIFs) with a minimum investment value of Rs 1 crore.

“SIFs will provide the flexibility of hedging strategies to manage risk on the investment, tailored portfolios, and practical asset allocation, making them perfect for those looking for higher returns with calculated risk, unlike traditional mutual funds,” said Ajay Kumar Yadav, CEO & CIO, Wise Finserv Private Wealth.

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The Securities and Exchange Board of India (SEBI) released a regulatory framework for SIFs on February 27.

Differentiated equity strategies

SIFs would enable fund houses to implement advanced investment strategies through open-ended, closed-ended, or interval structures. Niranjan Avasthi, Senior Vice President and Head-Products, Marketing and Digital at Edelweiss MF called the introduction of SIFs the start of a new era in the mutual fund industry.

According to Kirtan Shah, founder of Credence Wealth, SIFs can be seen as traditional mutual funds that are allowed to do 25 percent derivatives. Mutual funds, as of now, cannot offer derivatives as an investment strategy, but only for hedging and portfolio rebalancing purposes.

In terms of equity investment strategies under SIF, Equity Long-Short Fund has been introduced, which can invest at least 80 percent in equity with up to 25 percent shorts allowed via derivatives.

Further in equity, Ex-Top 100 Long-Short Fund can invest at least 65 percent in stocks outside the top 100 by market cap. Similarly, up to 25 percent short exposure is permitted in non-large-cap stocks via derivatives.

Additionally, under SIF, sector rotation long-short funds would be able to invest at least 80 percent in up to four sectors with 25 percent short exposure at the sector level.

Other new categories

In debt segments, SIFs can offer a Debt Long-Short Fund that can invest across different debt instruments with short exposure via exchange-traded debt derivatives. Further, a sectoral debt long-short fund can take exposure to debt instruments across at least two sectors with up to 25 percent short exposure at the sector level. The hybrid strategies are active asset allocator long-short and hybrid long-short fund.

SIFs versus mutual funds

The Equity Long-Short Fund would be similar to a flexicap fund, while the Equity (Ex-Top 100) Long-Short Fund would function like a mid-small cap fund. Further, a sector Rotation Long-Short Fund would be like a sectoral fund.

The key difference versus mutual funds is that SIFs would allow a 25 percent derivatives exposure. When it comes to fixed income, SIF’s Debt Long-Short Fund would be like a Dynamic Bond fund in mutual funds.

The Sectorial Debt Long-Short Fund is a new category in which investments need to be made in a minimum of two sectors and one sector cannot have more than 75 percent weight. Again, the key difference on the fixed income side is the derivatives exposure of up to 25 percent.

Active Asset Allocator Long-Short Fund would work like MFs' Multi Asset Fund and Hybrid Long-Short Fund would be akin to a Balanced Advantage Fund.

Can SIFs help investors?

According to Shah, the advantage of the 25 percent derivatives is that the fund can leverage and generate more returns on the long side or can also make more returns by shorting a stock or a sector on the downside.

“But it can also be a double-edged sword and hence this is an element that needs to be handled very carefully,” he said in a note on X.

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Though the ticket size has been significantly reduced to Rs 10 lakh, investors will now have access to sophisticated yet complex products, including derivatives, as part of their investment portfolio.

“SIFs have different investment limits, offering fund managers greater flexibility. As a result, investors will not only get a new product in name but also a truly differentiated offering in terms of how these funds can be structured. There are also clear rules on who can distribute these products and how investors can evaluate benchmarks and risk-reward metrics,” said Santosh Joseph, Co-founder and CEO, Germinate Investor Services.

As per Yadav, features like Systematic Investment Plan, Systematic Withdrawal Plan and Systematic Transfer Plan offering liquidity also work as a key advantage similar to that of mutual funds but with higher concentration risk.

“The introduction of a pictorial risk meter (Risk Band 1 to 5) by SEBI promotes transparency, helping investors to make knowledgeable decisions,” Yadav said. According to experts, beyond mutual funds, SIFs can offer a great opportunity to increase returns to investors willing to take higher risks.

However, investors should carefully evaluate the offerings, seek professional advice, and assess the need for such exotic products in their portfolio before investing.