The Securities and Exchange Board of India (SEBI) is set to implement a new regulatory framework for Specialized Investment Funds (SIFs) starting on April 1, 2025. The new investment option seeks to enhance portfolio flexibility and close the gap between mutual funds and Portfolio Management Services (PMS).
The difference between investment choices -- Specialized Investment Funds, mutual funds, and Portfolio Management Services (PMS) -- is determined by the degree of regulatory supervision, investment adaptability, and eligibility criteria for investors.
SEBI feels that India's financial markets have seen a growth in investment offerings with differing levels of risk, complexity, and regulatory monitoring. However, there is a noticeable disparity between mutual funds and Portfolio Management Services (PMS).
As stated by the capital market regulator, SIFs are crafted to provide investors with a combination of flexibility and regulatory protection.
"Over the years, a gap has emerged between MFs and PMS in terms of portfolio flexibility, creating an opportunity for a new investment product. To bridge this gap, the SEBI (Mutual Funds) Regulations, 1996 have been amended to introduce the broad regulatory framework for the new investment product," the market regulator said releasing guidelines.
Market Expert Deepak Shenoy, in a post on X, stated that the only difference with mutual funds is that SIFs can buy put options and can do short positions up to 25% AUM, and options are considered as only premium exposure (in MFs, it's the total intrinsic value).
"The new SIF regulations are here. - Mutual funds with 10K cr AUM (3yr avg) or those that appoint an experienced CIO/FM can get an SIF license - SIFs will have a different brand name from the AMC and logo - SIFs need min 10L across all SIF schemes, net of redemption - Can have put options and naked short positions (MFs can't) upto 25% of total AUM - Strategies are specific - Equity long/short, sector rotation, and a bunch of others - will go through in detail later. - Only difference with mutual funds: can buy put options, can do short positions upto 25% AUM and options are considered as only premium exposure (in MFs, it's the total intrinsic value) - No profit sharing or performance fees are allowed," Shenoy wrote on X.
CA Tapan Doshi said: "The new SIF regulations change the game for mutual funds. For the first time, funds can short up to 25% of AUM and use put options—something traditional MFs couldn’t do. This opens the door for hedge fund-like strategies while staying within SEBI’s framework. No profit-sharing or performance fees means fund houses won’t have the typical hedge fund incentives, but strategic flexibility just went up. Long-short, sector rotation, structured bets—SIFs could bring a new edge to the market. The key? How AMCs adapt and whether investors truly understand the risk-reward of these products. Institutional investors might love it, but retail needs to tread carefully."
SIF framework
Sebi has approved the launch of seven comprehensive investment strategies under SIF spanning equity, debt, and hybrid asset classes.
Within the equity segment, three distinct strategies have been defined:
Equity Long-Short Fund: This strategy requires a minimum equity exposure of 80%, with a maximum short exposure of 25% through unhedged derivative positions in equity.
Equity Ex-Top 100 Long-Short Fund: With a minimum equity exposure of 65% in stocks excluding the top 100 by market capitalisation, this strategy allows for a maximum short exposure of 25% through unhedged derivative positions in equity, excluding large-cap stocks.
Sector Rotation Long-Short Fund: This strategy mandates a minimum investment of 80% in equity instruments spread across a maximum of four sectors.
In the debt segment, there are two strategies available: the Long-Short Fund and the Sector Long-Short Fund.
The hybrid market will consist of two strategies: actively managed asset allocation long-short funds and hybrid long-short funds.
Equity-focused investment strategies will be benchmarked against a relevant broad market index such as BSE Sensex, NSE Nifty, BSE 100, CRISL 500, etc. On the other hand, debt-focused and hybrid investment strategies will be compared to a broad market index that accurately reflects the composition of the fund's portfolio.
As per experts, the Equity Long-Short Fund could be compared to a flexicap fund, with the Equity (Ex-Top 100) Long-Short Fund resembling a mid-small cap fund. Additionally, a Sector Rotation Long-Short Fund would be similar to a sectoral fund.
One distinct feature of Separately Managed Accounts (SMAs) is the ability to have a 25 percent derivatives exposure, setting them apart from traditional mutual funds. In the fixed income space, an SMA's Debt Long-Short Fund would be akin to a Dynamic Bond fund in mutual funds.
Minimum investment
Under the new framework, investors must now commit a minimum investment of Rs 10 lakh across all SIF strategies. However, accredited investors are exempt from this requirement. For investors utilising systematic investment plans (SIP), systematic withdrawal plans (SWP), or systematic transfer plans (STP), the total investments must not drop below Rs 10 lakh. In the event that market fluctuations cause the value to fall below this threshold, investors will have the option to redeem the remaining amount in full.
SIFs can adopt different structures, such as open-ended, close-ended, or interval-based investment strategies. The frequency of subscription and redemption in an investment strategy within a SIF may vary based on the nature of the investments, including appropriate time intervals. It is important to note that the frequency of subscriptions and redemptions for an investment strategy may differ from each other.
Who can set up SIFs
A mutual fund that is registered must submit an application to SEBI for prior approval in order to establish a Special Investment Fund (SIF).
There are two pathways through which mutual funds can establish a SIF, provided they meet the criteria under either route.
In the first route, mutual funds must have a minimum operational track record of three years and an average Assets Under Management (AUM) of at least Rs 10,000 crore over the last three years.
The second route, known as the alternate route, requires the Chief Investment Officer (CIO) for the SIF to have at least 10 years of fund management experience and to have managed an average AUM of not less than Rs 5,000 crore.
Additionally, an additional fund manager with three years of experience and an average AUM of not less than Rs 500 crore is needed. SEBI has also specified that the Asset Management Company (AMC) may allocate resources for operations between mutual funds and SIF.