In one of the most significant innovations in India’s asset-management industry, Specialised Investment Funds (SIFs) have been introduced as a new class of high-flexibility investment products aimed at affluent investors. With a minimum entry ticket of ₹10 lakh, these funds offer hedge-fund-style strategies—until now the preserve of AIF Category III vehicles and PMS portfolios—within the regulatory structure of mutual funds.
Industry experts view SIFs as a significant advancement for sophisticated investors seeking absolute returns through dynamic and complex strategies, particularly in an increasingly volatile market environment.
Hedge-Fund Tools, Mutual Fund Framework
Unlike conventional mutual funds, SIFs can take up to 25% unhedged short positions using equity derivatives, allowing them to profit from falling markets. They may also build concentrated sectoral or security exposures, with rules permitting up to 75% allocation to a single sector or 80% to a handful of hand-picked stocks or debt instruments.
Hybrid SIFs further expand the opportunity set by actively reallocating across equities, debt, commodities, REITs, and InvITs while using derivatives both for hedging and tactical bets.
To manage liquidity risks arising from these advanced strategies, SIFs can define their own redemption cycles—ranging from daily to weekly, or even with notice periods—unlike traditional mutual funds that offer daily liquidity by default.
Who They Target
SIFs are intended for financially experienced investors capable of handling elevated risk. These investors typically seek higher alpha, lower drawdowns, and the ability to generate returns regardless of the broader market direction. Wealth managers say SIFs will appeal to investors who have outgrown plain-vanilla equity and debt funds but do not wish to commit ₹1 crore or more to AIFs or PMS mandates.
Tax Structure Favourable for Investors
SIFs enjoy tax treatment identical to mutual funds, with gains taxed only at redemption.
For equity-oriented SIFs:
- Short-term capital gains (less than 12 months): 20%
- Long-term capital gains (more than 12 months): 12.5%
Debt and hybrid SIFs follow existing MF taxation norms for their categories.
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Some open-ended SIFs may deduct taxes at source for investor convenience, though others require investors to self-report realised gains. Importantly, SIFs do not levy performance fees—unlike AIF Cat III or PMS structures—keeping total expenses capped at 2.25%. Gains from short or derivative trades are treated as capital gains, not business income, offering further tax efficiency.
Where SIFs Excel
SIFs tend to outperform in volatile, sideways, or declining markets. Their long–short structure, hedging tools, and ability to exploit price dispersion give them an edge when traditional long-only funds struggle.
They can also deliver strong returns during sector booms or macro-economic dislocations because of their flexibility to take concentrated, high-conviction positions. However, during sharp bull markets, traditional equity mutual funds often have the upper hand as SIFs may be partially hedged.
Portfolio Benefits and Emerging Demand
Wealth advisors argue that SIFs can play a significant stabilising role in a diversified portfolio. By incorporating short positions and tactical derivatives, these funds typically reduce overall volatility, lower drawdowns, and improve risk-adjusted returns. They are also a unique source of additional alpha in range-bound markets where standard equity funds tend to underperform.
But risks remain. SIFs are complex vehicles and can be volatile. Liquidity constraints—stemming from defined redemption cycles—require investors to plan their exits.
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Suggested Allocation Across Life Stages
Market experts suggest a calibrated approach to SIF allocation. Younger investors in the accumulation phase may limit SIF exposure to 20–30%, with the bulk of investments in traditional mutual funds. During the consolidation phase, the mix could shift to 40–60% in SIFs. Retirees may restrict SIF allocation to around 20%, using it primarily for stability and hedging.
A New Frontier for India’s Affluent Investors
With their hedge-fund-style toolkits, SIFs mark the most sophisticated investment alternative yet available to Indian retail and high-net-worth individuals without stepping into the ₹1-crore-plus AIF/PMS zone. While not a replacement for traditional equity funds during roaring rallies, SIFs offer meaningful advantages: reduced drawdowns, better diversification, and the ability to generate alpha in turbulent or non-trending markets.
As volatility becomes a defining feature of global markets, SIFs may quickly become a preferred vehicle for investors seeking professional-grade strategies at accessible entry levels. (The author can reach out at srinivasbg@invictusfinserv.com)
