SEBI clarifies rules for Specialized Investment Funds: What investors need to know

Markets regulator SEBI has issued important clarifications around its regulatory framework for Specialized Investment Funds (SIFs)—a newly introduced category aimed at bridging the gap between traditional mutual funds and portfolio management services (PMS). These updates refine earlier rules announced in February and offer more clarity for both fund houses and investors.

Here’s a breakdown of what’s new and why it matters to investors:

> Minimum investment threshold clarified

SEBI has now explicitly stated that the Rs 10 lakh minimum investment requirement applies at the PAN level across all SIF strategies of an asset management company (AMC)—not per scheme. This helps investors avoid confusion when allocating capital across multiple SIF offerings under the same fund house.

Key exemption: This threshold does not apply to designated employees of AMCs making mandatory investments under the "skin-in-the-game" rule, which is designed to align employee interests with investors.

> Interval strategy gets more flexibility

SEBI has granted interval strategies under SIFs an exemption from the strict maturity-matching rules that apply to regular interval schemes. Previously, fund managers could only invest in securities maturing before the next transaction window. Now, SIFs have more room to invest in longer-tenure or less liquid instruments—potentially enhancing returns for investors willing to stay invested over longer horizons.

This move opens up opportunities for more sophisticated, unconstrained investment approaches within a regulated structure.

> Why SIFs matter for investors

Specialized Investment Funds (SIFs) are designed for investors who seek greater portfolio flexibility than mutual funds, but still want the regulatory safeguards missing in PMS or hedge fund-like structures.

Some unique features of SIFs:

Short-selling allowed: Fund managers can go short up to 25% of the net portfolio using derivatives. This enables strategies that profit not just from rising stocks, but from falling ones as well.

Equity exposure requirement: At least 80% of assets in equity-oriented SIFs must remain invested in equity and related instruments.

Targeted at experienced investors: The product is built for those comfortable with moderate complexity and higher minimum investments.

> Investment strategies

SEBI has granted permission for Strategic Investment Funds (SIFs) to provide three distinct categories of investment strategies. The first category consists of Equity-Oriented Strategies, which encompass funds like Equity Long-Short Funds and Sector Rotation Funds. The second category comprises Debt-Oriented Strategies, such as Debt Long-Short Funds and Sectoral Debt Funds. Finally, the third category encompasses hybrid Strategies, which consist of Active Asset Allocator Funds and Hybrid Long-Short Funds.

Equity-Oriented Strategies primarily focus on equity and derivatives, with a limited short exposure. For instance, the Equity Long-Short Fund requires a minimum investment of 80% in equities, with a short limit of 25%. The Equity Ex-Top 100 Long-Short Fund excludes large-cap stocks, while maintaining an equity exposure of 65%. Additionally, the Sector Rotation Long-Short Fund prioritizes up to four specific sectors for investment.

Debt-Oriented Strategies: These strategies focus on investing in fixed-income securities. The Debt Long-Short Fund offers exposure to different durations, while the Sectoral Debt Long-Short Fund concentrates on two or more sectors with a limit of 75% exposure per sector.

Hybrid Strategies: These strategies involve a mix of asset classes. The Active Asset Allocator Long-Short Fund dynamically distributes investments among equity, debt, REITs, and commodities. The Hybrid Long-Short Fund mandates a minimum investment of 25% in both equity and debt.

The current framework only permits one strategy per category per SIF.

AMC eligibility to launch SIFs

SEBI has defined two eligibility routes for AMCs looking to launch SIFs:

Track record-based route:

AMC must have at least three years of operations

Average AUM of Rs 10,000 crore or more over the last three years