Specialized Investment Funds (SIF) : New Investment by SEBI

The Securities and Exchange Board of India (SEBI) has introduced a new regulatory framework for Specialized Investment Funds (SIF), aiming to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS). This framework, effective from April 1, 2025, offers greater portfolio flexibility while ensuring regulatory oversight. Here’s a comprehensive breakdown of the key aspects of SEBI’s new guidelines.

What is a Specialized Investment Fund (SIF)?

SIF is a newly introduced category of investment product that provides enhanced flexibility in managing portfolios. It allows asset management companies (AMCs) to offer more dynamic investment strategies compared to traditional mutual funds while maintaining a structured regulatory framework.

Eligibility Criteria for SIF Approval

To establish a Specialized Investment Fund(SIF), mutual funds must meet specific eligibility criteria under two routes:

1. Route 1: Sound Track Record
   • The mutual fund must have been operational for at least three years.
   • The fund must maintain an average Asset Under Management (AUM) of INR 10,000 crore over the preceding three years.
   • No regulatory actions under Section 11, 11B, or 24 of the SEBI Act must have been initiated against the AMC in the last three years.
2. Route 2: Alternate Route
   • The AMC must appoint experienced fund management professionals:
     • Chief Investment Officer (CIO) with a minimum of 10 years of fund management experience and an AUM of INR 5,000 crore.
     • Additional Fund Manager with at least 3 years of experience managing an AUM of INR 500 crore.
   • Similar to Route 1, no regulatory actions should have been taken against the AMC in the last three years.

Differentiation between SIF and traditional Mutual Funds:

• AMCs must maintain a distinct brand name and logo for SIF.
• The existing mutual fund brand can be referenced using terms like “brought to you by” for the first five years.
• The font size of the mutual fund brand must be equal to or smaller than the SIF brand name.
• AMCs are required to maintain a separate website or web page for SIF to distinguish it from regular mutual fund offerings.

Permitted Investment Strategies

SIFs can adopt diverse investment strategies under three categories:

1. Equity-Oriented Strategies:
   • Equity Long-Short Fund: Requires a minimum of 80% investment in equity with up to 25% short exposure via derivatives.
   • Equity Ex-Top 100 Long-Short Fund: Focuses on stocks outside the top 100 by market capitalization, with 65% minimum investment and 25% maximum short exposure.
   • Sector Rotation Long-Short Fund: Invests in up to four sectors with 80% minimum equity exposure and 25% short exposure.
2. Debt-Oriented Strategies:
   • Debt Long-Short Fund: Invests across the debt spectrum with unhedged short exposure through debt derivatives.
   • Sectorial Debt Long-Short Fund: Requires at least two sectors with a maximum of 75% investment in a single sector and 25% short exposure.
3. Hybrid Investment Strategies:
   • Active Asset Allocator Long-Short Fund: Dynamically invests across equity, debt, REITs/InVITs, and commodities.
   • Hybrid Long-Short Fund: Requires a minimum of 25% investment in both equity and debt, with up to 25% short exposure.

Minimum Investment Threshold

To ensure exclusivity and align with institutional-grade investment strategies:

• Minimum investment of INR 10 lakh per investor across all SIF strategies.
• Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP) are allowed under SIF, maintaining compliance with the investment threshold.
• Breaches due to market fluctuations (passive breaches) are not violations, but investors must redeem their entire amount if the value falls below the threshold.

Derivatives and Risk Management

• SIFs can take unhedged short positions in exchange-traded derivatives up to 25% of net assets.
• Derivative exposure calculations align with SEBI’s Master Circular guidelines.
• AMCs can offset derivative positions if they pertain to the same underlying security with matching expiry dates.

Subscription and Redemption Guidelines

SIFs offer various subscription and redemption frequencies:

• Investment strategies can be open-ended, close-ended, or interval-based.
• Redemption frequency is flexible, including daily, weekly, or other specified intervals.
• Notice periods of up to 15 working days can be applied for redemption based on liquidity considerations.

Transparency and Disclosure

SEBI emphasizes investor protection through enhanced transparency:

• Portfolio disclosures, including ISIN codes, must be provided every alternate month.
• Investment Strategy Information Document (ISID) must include scenario analysis to depict potential investor losses.
• Risk levels of each SIF strategy must be disclosed using a five-level “Risk-Band” system, updated monthly.

Conclusion-

The introduction of the Specialized Investment Fund (SIF)framework by SEBI represents a significant development in India’s investment landscape. It bridges the gap between mutual funds and PMS by offering greater portfolio flexibility while maintaining robust regulatory oversight. As this framework becomes effective on April 1, 2025, it opens new opportunities for investors seeking sophisticated investment strategies within a well-regulated environment.Please contact your Financial Advisor for more details