A wave of innovation in Indian asset management has arrived with the launch of Specialised Investment Funds (SIFs). These funds, available to investors with a minimum investment of Rs 10 lakhs, offer sophisticated strategies similar to what was previously reserved for AIFs and PMS portfolios. SIFs deliver the ability to take unhedged short derivative positions, concentrated bets, and dynamic asset allocation—all within a mutual fund regulatory wrapper.
Structural Features & Strategies
- Short Selling and Derivatives: SIFs can take up to 25% unhedged short positions using equity futures and options, enabling them to profit not only from rising but also falling prices—something traditional mutual funds cannot do.
- Concentration Power: Equity and debt SIFs may hold up to 75% of assets in a single sector, or run concentrated portfolios (for example, 80% allocation to select equities or debt). This is a high-conviction strategy mimicking hedge funds.
- Active & Hybrid Allocation: Hybrid SIFs dynamically allocate across equity, debt, REITs/InvITs, and commodities, using derivatives for both hedging and speculative purposes.
- Liquidity and Redemption: Unlike regular mutual funds, SIFs may not offer daily redemption. Frequencies are disclosed at launch (e.g., daily, weekly, with notice periods) to manage liquidity risks stemming from their exotic strategies.
Who Should Consider SIFs?
SIFs cater to financially advanced investors who can tolerate elevated risk and seek greater flexibility, alpha, and diversification. These vehicles suit those aiming for “absolute” returns, regardless of overall market direction, and willing to accept possible drawdowns in exchange for potential upside.
Taxation of SIFs
- Tax Method: Gains from SIF investments (like those from mutual funds) are taxed only on redemption—not annually.
- Equity-Oriented SIFs:
- Short-term capital gains (held <12 months): 20%
- Long-term capital gains (held >12 months): 12.5%
- Debt/Hybrid SIFs: Taxed per prevailing MF rules for debt/hybrid categories at both short-term and long-term rates.
- TDS (Tax Deduction at Source): For some open-ended SIFs, taxes may be deducted by the fund itself for investor convenience; in other cases, investors must self-report and pay tax on churn and realization.
- Performance Fees: Unlike AIF Cat III and PMS strategies, SIFs typically do not levy performance fees, limiting charges to expense ratios capped at 2.25%.
- Derivative Gains: Taxation of gains from short or derivative strategies falls under capital gains, not business income (as for AIFs/PMS).
When Do SIFs Perform Best?
- Volatile or Sideways Markets: SIF managers exploit price dispersion using long-short and derivative strategies, outperforming conventional long-only funds.
- Macro Stress or Sector Booms: Concentrated SIFs may generate outsized returns during powerful thematic cycles, high volatility, or crisis periods, but carry higher drawdown risk.
- Bear Markets: SIFs can hedge or short, aiding absolute return delivery when equity markets fall.
Adding SIF strategies to an existing mutual fund portfolio can provide multiple benefits for investors seeking better risk management and diversification, especially in volatile or uncertain markets.
Key Benefits
- Reduction in Portfolio Volatility
Integrating SIF strategies—particularly those using long-short approaches—tends to statistically lower overall portfolio volatility. By combining funds that take short positions alongside traditional long-only mutual funds, the resulting portfolio enjoys better risk metrics (such as lower standard deviation and improved Sharpe ratios).
- Enhanced Diversification and Lower Drawdowns
Short positions and derivative exposures in SIF funds act as hedges, offsetting losses during market corrections, consolidations, or bear phases. This diversification reduces the risk of large drawdowns for a portfolio that is otherwise long-biased, stabilizing returns across varied economic and market cycles.
- Unique Source of Additional Alpha
SIF strategies are not just defensive—actively managed short exposures, tactical trades, and dynamic allocation can generate “alpha” (return above market benchmarks), especially when markets are volatile, range bound, or undergoing corrections. By profiting from both rising and falling stocks, these funds provide avenues for positive returns when conventional equity funds underperform.
Key Risks
- Complexity & volatility: SIFs are high-risk, complex vehicles. They require careful monitoring and skillful management, and are not suitable for conservative or inexperienced investors.
- Liquidity: Redemption frequency and notice periods mean investors must be comfortable with some lock-in and cannot always liquidate instantly.
Performance Across Market Phases
- Raging Bull Markets: Traditional equity MFs outperform; SIFs may lag due to short exposure.
- Bull and Consolidating Markets: Both types show solid performance; SIFs’ diversification improves stability.
- Correction, Bear, Volatile, or Range bound Markets: SIFs typically outperform long-only funds, as short positions limit losses and may generate gains.
Strategic Allocation: Lifecycle Approach
- Younger investors (Planning/Accumulation Phase): Higher allocation to traditional MFs (up to 70–80%), with 20–30% in SIF for diversification and “event risk” hedging.
- Middle age/Consolidation: Mix shifts to 40–60% SIF, reducing equity-centric risk while still capturing alpha.
- Retirement/Distribution: Conservative allocation (20%) to SIF for stability, with 80% in core funds.
Conclusion
SIFs are the closest thing Indian retail investors have ever gotten to hedge-fund strategies without crossing into the ₹1-crore AIF/PMS world. They are not a replacement for traditional equity funds in roaring bull markets, but they are extremely valuable for:
- Reducing portfolio drawdowns
- Generating alpha in non-trending markets
- Giving genuine diversification beyond plain-vanilla long-only funds
If you already have a mutual-fund portfolio and are comfortable with ₹10 lakh tickets and occasional weekly/monthly liquidity, adding 20–40% in well-chosen SIFs (especially long-short or dynamic asset-allocation ones) is currently one of the smartest upgrades you can make in the Indian context.
