Taxmann’s Analysis | Specialised Investment Funds (SIFs) – Bridging the Gap Between Mutual Funds & PMS

Specialised Investment Funds (SIFs) are investment vehicles introduced by SEBI to offer high-net-worth and institutional investors enhanced portfolio flexibility beyond traditional mutual funds. Designed to bridge the gap between conventional mutual funds and Portfolio Management Services, SIFs leverage advanced strategies such as long-short equity, sectoral rotation, and hybrid asset allocation within a regulated framework. With clear eligibility criteria and strict regulatory oversight, SIFs provide a structured yet innovative option for diversifying portfolios and managing market risks effectively.

Table of Contents

1. Introduction
2. Understanding Specialised Investment Funds (SIFs)
3. Why Now? The Shifting Investment Landscape
4. Who Are Eligible to Invest in SIFs?
5. Lock-in and Redemption Frequency for SIF Investment Strategies
6. What are the Key Features of SIFs?
7. Branding and Differentiation Requirements for Specialised Investment Funds (SIFs)
8. What are the Investment Strategies under SIF?
9. What are the Investment Restrictions for SIF?
10. Can SIFs Invest in Derivative Products?
11. Can AMCs Impose a Notice Period for Redemptions?
12. What are the Disclosure Requirements for Specialised Investment Funds (SIF)?
13. Conclusion

1. Introduction

The Indian investment management landscape has evolved significantly, offering various financial products tailored for retail, high-net-worth individuals (HNIs), and institutional investors. SEBI regulates these investment vehicles based on complexity, investor sophistication, and minimum investment requirements. The regulatory framework progresses from Mutual Funds (MFs), which are highly regulated and retail-focused, to Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), which provide more flexibility but cater to sophisticated investors.

Over time, a gap has emerged between MFs and PMS in terms of portfolio flexibility and investment strategies. To address this, SEBI has introduced Specialised Investment Funds (SIFs) by amending the Mutual Funds Regulations, 1996. SIFs are structured to bridge the gap by offering enhanced investment options while maintaining regulatory oversight. They cater to investors seeking more flexibility than mutual funds but with a structured regulatory framework compared to PMS.

2. Understanding Specialised Investment Funds (SIFs)

Specialised Investment Funds (SIFs) are a new category of investment vehicles introduced by SEBI to provide greater portfolio flexibility for high-net-worth and institutional investors. SIFs are designed to offer investment strategies that go beyond traditional mutual funds, incorporating advanced financial instruments such as long-short equity, sectoral rotation, and hybrid asset allocation.

3. Why Now? The Shifting Investment Landscape

• Evolving Investor Preferences – Many investors seek active portfolio management beyond traditional MFs, preferring hedging strategies, leverage, and sector-specific allocations.
• Global Alignment – Markets like the U.S. and Europe offer hedge funds and hybrid investment vehicles that allow greater flexibility. SIFs bring similar options within SEBI’s regulatory framework.
• Regulatory Evolution – SEBI has progressively introduced reforms to modernise India’s financial markets, from allowing passive index funds to tightening AIF norms. SIFs are another step in this direction, bridging the gap between conventional and sophisticated investment products.

By launching SIFs, SEBI is expanding investment choices and ensuring investor protection, reinforcing India’s position as a well-regulated and innovation-driven investment hub.

4. Who Are Eligible to Invest in SIFs?

Any investor can invest at least Rs. 10 lakh across all investment strategies within an SIF at the Permanent Account Number (PAN) level. In contrast, accredited investors are exempt from this requirement.

Additionally, investors may opt for Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP), subject to compliance with the minimum investment threshold.

5. Lock-in and Redemption Frequency for SIF Investment Strategies

The subscription, lock-in, and redemption frequency of an investment strategy under SIF may vary based on the nature of the investments. Permissible frequencies include daily, weekly, fortnightly, monthly, quarterly, annually, fixed maturity, or other suitable intervals. Additionally, the subscription, lock-in, and redemption frequencies may differ.

6. What are the Key Features of SIFs?

The key features of Specialised Investment Funds (SIFs) include:

6.1 Eligibility Criteria for Establishing a Specialised Investment Fund (SIF)

A registered mutual fund may establish a Specialised Investment Fund (SIF) by meeting the eligibility criteria under one of the following routes:

6.1.1 Route 1 – Sound-track Record

• The mutual fund must have operated for at least three years with an average AUM of Rs. 10,000 crores in the preceding three years.
• In the last three years, no regulatory action should have been initiated or taken against the sponsor or AMC under Sections 11, 11B, or 24 of the SEBI Act, 1992.

6.1.2 Route 2 – Alternate Route

The AMC must appoint:

• A Chief Investment Officer (CIO) with at least 10 years of fund management experience and an average AUM of at least Rs. 5,000 crores.
• An additional Fund Manager with at least three years of experience and an average AUM of Rs. 500 crores.

The sponsor or AMC must not have faced any regulatory action under Sections 11, 11B, or 24 of the SEBI Act, 1992, in the last three years.

7. Branding and Differentiation Requirements for Specialised Investment Funds (SIFs)

As per Regulation 49AB, an AMC must ensure clear differentiation between a Specialised Investment Fund (SIF) and its Mutual Fund business. To maintain brand integrity, the following guidelines apply:

• Distinct Identity – SIF must have a unique brand name and logo, separate from the Mutual Fund.
• Limited Use of MF Brand – The AMC may reference the sponsor’s or Mutual Fund’s brand in SIF’s offer documents and promotions for up to five years using terms like “brought to you by” or “offered by.”
• Font Size Compliance – The sponsor’s or Mutual Fund’s brand name must appear in a font size equal to or smaller than the SIF’s brand name in all materials.
• Adherence to Advertising Norms – SIF must follow MF advertisement guidelines for all investment strategies.
• Dedicated Online Presence – A separate website or webpage must be maintained for SIF to ensure clear distinction from Mutual Fund offerings.

8. What are the Investment Strategies under SIF?

As per Regulations 49U(c) and 49Y(1) of the MF Regulations, investment strategies under a Specialised Investment Fund (SIF) shall be launched in accordance with mutual fund scheme procedures. The following strategies are permitted under SIF:

S. No.	Category	Investment Strategy	Description
1.	Equity-Oriented Investment Strategies	(a) Equity Long-Short Fund	Invests at least 80% in equity with up to 25% short exposure via derivatives.
		(b) Equity Ex-Top 100 Long-Short Fund	Allocates at least 65% to stocks outside the top 100 by market cap, with up to 25% short exposure in non-large-cap stocks.
		(c) Sector Rotation Long-Short Fund	Invests 80% in four sectors, with up to 25% short exposure at the sector level.
2.	Debt-Oriented Investment Strategies	(a) Debt Long-Short Fund	Invests in debt instruments across durations, with short exposure through exchange-traded debt derivatives.
		(b) Sectoral Debt Long-Short Fund	Invests in debt across at least two sectors, limiting a single sector’s allocation to 75%, with up to 25% short exposure.
3.	Hybrid Investment Strategies	(a) Active Asset Allocator Long-Short Fund	Dynamically invests across equity, debt, REITs/InVITs, and commodity derivatives, with up to 25% short exposure.
		(b) Hybrid Long-Short Fund	Allocates a minimum of 25% to equity and debt each, with up to 25% short exposure.

9. What are the Investment Restrictions for SIF?

In addition to the restrictions under Regulation 49(AA) of the MF Regulations, the following limits apply to investments under SIF:

9.1 Single Issuer Limits

• Maximum 20% of NAV in AAA-rated debt/money market securities.
• Max 16% in AA-rated securities.
• Maximum 12% in A-rated and below securities.
• A 5% extension is allowed with prior approval from the trustee and AMC board.

9.2 Sectoral Limits

• Maximum 25% of NAV in a single sector’s debt/money market securities.
• Maximum 25% of NAV in a single sector’s debt/money market securities.

10. Can SIFs Invest in Derivative Products?

As per Regulation 49Z(1) of the MF Regulations, SIF can invest in eligible derivative products subject to the following conditions:

10.1 What are the Exposure Limits?

• Investment strategies under SIF may take up to 25% of net assets in exchange-traded derivative instruments for purposes other than hedging and portfolio rebalancing.
• This allows unhedged short exposure through derivatives and hedging and rebalancing-related exposure.

10.2 How to Compute Derivative Exposure?

• Futures (Long and Short) – Futures Price × Lot Size × Number of Contracts
• Options Bought – Option Premium Paid × Lot Size × Number of Contracts
• Options Sold – Market Price of Underlying × Lot Size × Number of Contracts
• Other Derivative Exposure – Notional Market Value of the Contract

10.3 Total Exposure Calculation

The sum of exposure through instruments in both cash and derivatives markets.

10.4 Offsetting at Portfolio Level

• Allowed between cash and derivative positions on the same underlying security.
• Allowed between derivative positions on the same underlying security.

11. Can AMCs Impose a Notice Period for Redemptions?

• AMCs may impose a notice period for redemptions based on the investment strategy’s structure and liquidity risk.
• If a notice period is applied, the NAV at the end of the notice period will be used to determine the redemption value. Further, the maximum notice period shall not exceed 15 working days.

12. What are the Disclosure Requirements for Specialised Investment Funds (SIF)?

12.1 Portfolio Disclosure

• The portfolio, including derivative instruments, must be disclosed as of the last day of every alternate month (May, July, September, November, January, and March).
• Disclosures should be available on the respective AMC website and the AMFI website
• The portfolio must be in a user-friendly, downloadable spreadsheet format.
• All mutual fund portfolio disclosure norms shall also apply to SIF investment strategies.

12.2 Scenario Analysis

• The Investment Strategy Information Document (ISID) must include a scenario analysis illustrating potential losses due to market movements.
• AMFI, in consultation with SEBI, will prescribe a model format by March 31, 2025.

12.3 Offer Documents

The following documents must be publicly available on the SIF and AMFI websites:

• Investment Strategy Information Document (ISID)
• Statement of Additional Information (SAI)
• Key Information Memorandum (KIM)

12.4 Standard Disclaimer

All advertisements and promotional materials must include the following disclaimer in legible fonts:

“Investments in Specialised Investment Fund involve relatively higher risk, including potential loss of capital, liquidity risk, and market volatility. Please read all investment strategy-related documents carefully before making an investment decision.”

Further, no disclaimer modifications (additions or deletions) are allowed.

13. Conclusion

Introducing Specialised Investment Funds (SIFs) bridges the gap between Mutual Funds and Portfolio Management Services, offering greater investment flexibility while maintaining regulatory oversight. With clear eligibility criteria, branding differentiation, structured investment strategies, and defined investment thresholds, SIFs cater to high-net-worth and institutional investors. The framework also ensures investor protection through stringent investment restrictions, derivative exposure limits, structured subscription and redemption policies, and comprehensive disclosure requirements.