How Specialised Investment Funds bridge the gap between mutual funds and PMS

With the recent introduction of Specialised Investment Funds (SIFs), Indian investors have a new avenue to potentially build wealth over time.

Introduced by the Securities and Exchange Board of India (SEBI) in December 2024, SIFs aim to bridge the gap between mutual funds and Portfolio Management Services (PMS), offering a middle ground for investors seeking advanced investment strategies with a lower entry barrier than PMS.

With a minimum investment threshold of Rs.10 lakh, SIFs cater to significantly higher income individuals. Unlike traditional mutual funds, SIFs are designed to accommodate relatively higher risks for potentially better returns in long term, making them likely suitable for seasoned investors who want more control over their portfolios.

• Table of contents

1. What do SIFs offer investors?
2. Features of specialised investment funds
3. Risk mitigation in SIFs
4. Difference between SIF and mutual funds
5. Who should invest in SIF?
6. Investment strategies offered by Specialised Investment Funds
7. Benefits of specialised investment funds
8. Eligibility criteria for launching and investing in SIFs

What do SIFs offer investors?

SIFs provide a unique blend of flexibility, diversification, and access to alternative asset classes. Here’s what you can expect.

• Access to niche markets: SIFs invest in sectors like private equity, venture capital, real estate, and distressed assets—areas typically inaccessible through mutual funds.
• Investment options: You can choose from open-ended, close-ended, or interval-based funds depending on your liquidity needs and investment horizon.
• Higher risk-return potential: By targeting high-growth sectors, SIFs aim to deliver potentially higher returns in long term compared to traditional investment vehicles.
• Regulatory oversight: SEBI ensures transparency and investor protection through stringent regulations.

Features of specialised investment funds

SIFs come with distinct features that set them apart from other investment options.

1. Minimum investment threshold: Rs.10 lakh for individual investors, making it accessible yet exclusive.
2. Structured flexibility
   • Open-ended funds allow you to enter or exit anytime.
   • Close-ended funds have fixed tenures for long-term investments.
   • Interval funds offer periodic redemption opportunities.
3. Diverse asset allocation: Can invest in debt instruments, equities and REiTs/InvITs
4. Professional management: Managed by certified fund managers with expertise in niche markets.
5. Expense ratio: Governed by SEBI’s mutual fund regulations, ensuring cost efficiency.

Risk mitigation in SIFs

While SIFs target high-risk investments, SEBI has implemented robust risk management measures.

• Diversification of limits: Capped exposure to individual securities and issuers reduces concentration risk.
• Transparency requirements: Detailed disclosures in offer documents ensure informed decision-making.
• Regulatory safeguards: Strict compliance with SEBI guidelines minimises operational risks.

These measures make SIFs a relatively less risky option compared to unregulated investment schemes while still allowing for higher return potential in long term.

Difference between SIF and mutual funds

While mutual funds can be suitable for retail investors seeking more risk mitigation measures, SIFs cater to those seeking advanced strategies and higher returns.

Who should invest in SIF?

SIFs are tailored for -

1. High-income earners: Investors with significant capital looking for sophisticated strategies.
2. Accredited investors: Individuals or institutions meeting SEBI’s accreditation criteria.
3. Risk-tolerant investors: Those willing to accept higher risks for potentially greater rewards.
4. Experienced market participants: Investors seeking more flexibility in investment strategies and asset allocation than that offered by mutual funds.

If you fall into any of these categories and seek diversification beyond traditional investments, SIFs could be a suitable investment opportunity.

Investment strategies offered by Specialised Investment Funds

The three broad categories of investment strategies offered by specialised investment funds:

• Equity oriented strategies: These include equity long-short funds, equity ex-top 100 long-short funds, and sector rotation long-short funds. These strategies invest primarily in equity and equity related instruments with limited short exposure through derivatives.
• Debt oriented strategies: These comprise debt long-short funds and sectoral debt long-short funds. The former can invest in debt instruments across various durations and the latter in debt securities of at least two sectors. Both types can also take limited short positions.
• Hybrid strategies: These include active asset allocator long-short funds and hybrid long-short funds . The former can dynamically allocate across multiple asset classes including equity, debt, derivatives, REITs/InVITs, and commodity derivatives, with limited short exposure in unhedged derivative positions of equity and debt instruments. Meanwhile, hybrid long-short funds invest across equity and debt.

Benefits of specialised investment funds

1. Enhanced flexibility
2. Higher return potential
3. Portfolio diversification
4. Regulatory oversight
5. Lower entry barriers compared to PMS

Eligibility criteria for launching and investing in SIFs

SEBI has established specific eligibility criteria for mutual funds intending to launch specialised investment funds. AMCs may qualify through two distinct routes:

Route 1 - Sound track record:

• The mutual fund must have been operational for a minimum of three years.
• Average assets under management of at least Rs. 10,000 crores over the immediately preceding three years.
• No regulatory action initiated or taken against the sponsor or AMC under sections 11, 11B, and/or 24 of the SEBI Act, 1992 during the last three years.

Route 2 - Alternate route:

• Appointment of a Chief Investment Officer with at least 10 years of fund management experience and an average AUM managed of not less than Rs. 5,000 crores.
• An additional fund manager with at least three years of experience who has managed an average AUM of not less than Rs. 500 crores.
• No regulatory action against the sponsor or AMC during the last three years.

For investors, SIFs maintain a minimum investment threshold of Rs. 10 lakh at the PAN level across all investment strategies offered by the SIF. This threshold does not include investments made in regular mutual fund schemes of the same AMC. The AMC may offer systematic investment options while ensuring compliance with this threshold requirement.

Conclusion

Specialised Investment Funds represent an interesting addition to India’s financial ecosystem. By bridging the gap between mutual funds and PMS, they offer an option for sophisticated investors seeking advanced strategies without exorbitant entry costs. Whether you’re looking to diversify your portfolio or capitalise on emerging markets, SIFs can provide the suitable tools to work towards your financial goals.

FAQs:

What is SIF (Specialised Investment Fund) introduced by SEBI?

A Specialised Investment Fund is a regulated investment vehicle designed for accredited investors willing to take on higher risks for potentially higher returns in long term. It bridges the gap between mutual funds and PMS by offering customisable strategies and access to niche markets.

Are SIFs more flexible than mutual funds?

Yes, SIFs offer greater flexibility in portfolio allocation unlike mutual funds that have to follow a certain allocation pattern based on the fund category. However, there are still regulatory restrictions on how much exposure the fund can take to a single security.

How does SIF work?

SIF pools capital from accredited investors and can invest it in debt securities, equities, REITs/InvITs. Managed by certified professionals, these funds aim for potentially higher returns in long term while adhering to SEBI’s regulatory framework.

What investment strategies does SIF offer?

The investment strategy depends upon the fund manager but is generally more flexible than that offered by mutual funds.

What is the minimum investment in SIF?

Under the Securities and Exchange Board of India (SEBI) framework, a minimum investment of ₹10 lakh at the PAN level is required across all strategies of a Specialised Investment Fund (SIF).

How are SIFs regulated?

Like the rest of the securities market, SIFs are also regulated by SEBI.

What types of assets can SIFs invest in?

SIFs may invest in equity and equity-related securities, debt and debt-related securities, derivatives, REITs/InVITs and commodities.

How do SIFs differ from PMS?

SIFs are pooled investment vehicles where multiple investors invest in defined investment strategies managed collectively. PMS offers discretionary or non-discretionary portfolio management on an individual basis, with separate portfolios for each client. SIFs have a minimum investment threshold of Rs. 10 lakh, as compared to Rs. 50 lakh for PMS.

Can retail investors invest in SIFs?

While the minimum investment is ₹10 lakh, the SIF category is intended for investors who may understand the higher risk entailed and the complex strategies on offer. Retail investors with the required financial capital and risk appetite may invest if they find the fund suitable.

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Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.