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Decoding Specialised Investment Funds: A New Asset Class for Savvy Investors

Decoding Specialised Investment Funds: A New Asset Class for Savvy Investors
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The financial scene in India is buzzing with changes, and one of the latest game-changers is SEBI’s introduction of Specialised Investment Funds (SIFs). SIFs are tailored investment options for savvy investors ready to explore advanced strategies and diverse asset classes.

This new asset class, between mutual funds and PMSes (Portfolio Management Services), will introduce Indian investors to various new investment products and strategies.

SEBI has set a minimum investment bar of ₹10 lakh for SIFs, making it clear that these funds are for those serious about investing. The available range of products now spans mutual fund schemes starting at ₹10, PMSes with a minimum investment of ₹50 lakh, and Alternative Investment Funds (AIFs) requiring at least ₹1 crore. Source: Moneycontrol

Let’s break down what SIFs are all about, why this move matters, and how it shakes up the investment world.

What Are Specialised Investment Funds (SIFs)?

SIFs are a new category of funds designed to offer advanced investment opportunities beyond traditional avenues like equity mutual funds or fixed deposits. 

SEBI’s new framework for SIFs exempts accredited investors (These investors are considered financially sophisticated and capable of handling higher-risk investments) from certain rules. Mutual funds can now offer investment strategies in open-ended, close-ended, and interval formats, catering to investors with varying risk levels and investment goals. 

SIFs allow investors to diversify their portfolios in a transparent structure. Launching new strategies will follow the same process as mutual funds, with clear details on subscriptions, redemptions, and fees in line with mutual fund regulations. Source: livemint

Key Features of SIFs

  • Diversification of Asset Classes: SIFs expose asset classes typically inaccessible to retail investors, such as real estate, infrastructure, or private debt.
  • Professional Management: SIFs are managed by experts with deep knowledge of specific sectors, ensuring informed investment decisions.
  • Regulated Framework: SEBI’s oversight ensures transparency, safeguarding investors from potential malpractices.
  • Customized Strategies: These funds often employ tailored strategies, including hedging and leverage, to optimize returns.

How SIFs Differ from Traditional Mutual Funds

While both SIFs and mutual funds pool resources from investors, their objectives and structures are distinct:

SEBI’s New Rules for Specialised Investment Funds (SIF)
FeatureSIFMF
StrategiesAdvancedStandard
StructureOpen, Close, or IntervalSame
Minimum Investment₹10 Lakh across all strategiesStarts from 100
Debt Instruments<20% per Issuer<10% per Issuer
Company Ownership<15% of Company<10% of Company
Equity Instruments<10% of corpus in a single companySame
REITs/InvITS<20%, per issuer <10%<10%, per issuer 5%
Distinct IdentitySeparate BuildingNA
Tax BenefitSameStandard, Eg, Equity Fund, STCG 20%, LTCG 12.5%
Source: LiveMint

Let’s look at the differences between SIFs and Mutual Funds.

  • Investment Limits and Flexibility

With a minimum investment of ₹10 lakh, Specialised Investment Funds (SIFs) provide asset managers with more flexibility compared to traditional mutual fund schemes. SIFs allow up to 15% allocation in a single security, which is notably higher than the 10% limit set for mutual funds. For fixed-income strategies, exposure can reach 20% in a single issuer, potentially increasing this limit to 25% with board approval. However, the existing 10% limit for a single issuer remains for traditional fixed-income strategies.

  • Expense Ratio and Fees

The cost structure for SIFs mirrors that of mutual funds. For example, equity funds can charge a maximum Total Expense Ratio (TER) of 2% for the first ₹250 crore. After that, the cost decreases incrementally—1.75% for the next ₹1,250 crore, 1.60% for amounts between ₹1,500 and 3,000 crore, and so on. Additional expenses can also be charged over the TER.

  • Increased Investment Limits for REITs and INVITs

A significant change with SIFs is doubling permissible investment limits in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) to 20%. This provides more flexibility in allocation and opens new avenues for diversification. In contrast, the limit for these investments in mutual funds is currently capped at 10%. Source: Moneycontrol

SEBI’s ₹10 Lakh Minimum Threshold: What It Means

The decision to set a minimum investment threshold of ₹10 lakh aims to ensure that only informed and financially capable investors participate in SIFs. Here’s why:

  • Targeting Sophisticated Investors: SIFs involve complex strategies and high risks. A higher threshold ensures participants understand the risks and have sufficient financial backing.
  • Mitigating Retail Participation Risks: By limiting access to high-net-worth individuals (HNIs) and institutional investors, SEBI protects less-informed retail investors from potential losses.
  • Encouraging Long-term Investments: The substantial minimum investment promotes a long-term approach, discouraging speculative trading.

Advantages of Investing in SIFs

  • Access to Advanced Strategies: Investors gain exposure to sophisticated strategies like arbitrage, hedging, and leverage, which are typically unavailable in traditional funds.
  • Portfolio Diversification: SIFs allow investors to diversify across unconventional asset classes, reducing reliance on traditional equities and bonds.
  • Potential for Higher Returns: With advanced strategies and exposure to high-growth sectors, SIFs offer the potential for superior long-term returns.
  • Professional Expertise: Experienced fund managers with sector-specific knowledge oversee these funds, enhancing decision-making quality.

Risks Associated with SIFs

While SIFs offer lucrative opportunities, they come with their share of risks:

  • High Entry Barrier: The ₹10 lakh threshold limits access to wealthy investors, excluding retail investors.
  • Complex Strategies: Advanced strategies can be challenging to understand, requiring a high level of financial literacy.
  • Market Volatility: Investments in REITs, InvITs, and private equity are subject to market fluctuations, making them inherently risky.
  • Illiquidity: Many SIFs have lock-in periods or restrictions on premature exits, reducing flexibility.

SEBI’s Regulatory Framework for SIFs

SEBI’s regulatory approach aims to balance protecting investors and fostering market growth. Key regulations include clear disclosure requirements, where fund managers must outline investment objectives, strategies, and risk factors. 

Only qualified and experienced professionals with proven track records can also manage SIFs, ensuring credibility. Regular audits and transparency in reporting further ensure compliance, which helps build trust among investors.

How SIFs Fit into India’s Financial Ecosystem

The introduction of SIFs aligns with India’s evolving financial market:

  1. Catering to HNIs and Institutional Investors: With rising wealth, demand for sophisticated investment products has increased among HNIs.
  2. Boosting Alternative Investments: SIFs support sectors like infrastructure and real estate, which are crucial for economic growth.
  3. Complementing Traditional Funds: SIFs provide an alternative for investors seeking diversification beyond conventional equity and debt funds.

Impact on Investors and Market Dynamics

The launch of SIFs is expected to offer several benefits. It will expand investment options by providing access to advanced strategies and unconventional asset classes. Additionally, the sophisticated nature of SIFs could attract global investors looking to tap into India’s growth potential. Moreover, the complexity of SIFs will likely boost financial literacy, encouraging the development of educational initiatives to help investors better understand these opportunities.

Expert Opinions on SIFs

Market experts believe SIFs hold significant potential. They encourage financial sophistication by pushing investors to grasp advanced financial concepts, promoting a culture of informed decision-making. Focusing on alternative assets and advanced strategies could spur innovation within India’s financial sector. 

However, the high entry barrier and complexity of SIFs may limit participation from retail investors, presenting challenges in inclusivity and broader investor engagement.

Who Should Invest in SIFs?

SIFs are best suited for:

  1. High-Net-Worth Individuals (HNIs): Investors with substantial disposable income and a high-risk appetite.
  2. Institutional Investors: Corporations, pension funds, and endowments seeking diversified portfolios.
  3. Sophisticated Retail Investors: Individuals with a strong understanding of financial markets and advanced investment strategies.

Conclusion

SEBI’s Introduction of Specialised Investment Funds (SIFs) is a milestone in India’s financial market evolution. While the ₹10 lakh minimum threshold ensures participation by informed investors, it also highlights the need for enhanced financial literacy. SIFs promise diversification, professional management, and the potential for high returns, making them a valuable addition to the investment landscape. However, their complexity and high-risk nature necessitate caution and thorough understanding.

FAQs

  1. Will SIFs help investors?

    Experts believe the SIF framework allows portfolio managers to create innovative, tailored products with broader exposure limits, enabling investors to pursue strategies that align with their risk profiles and financial goals.SIFs offer unique opportunities not found in mutual funds, particularly in concentration and thematic approaches, as well as credits. 

  2. Can SIFs use derivatives in their investment strategy?

    Currently, mutual funds are restricted from using derivatives for investment, allowing them only for hedging and portfolio rebalancing. Earlier this year, SEBI proposed allowing SIFs to use derivatives as an investment strategy. However, the final framework remains unclear, which is crucial for modern portfolio management.

  3. What are the potential benefits?

    Access to innovative sectors, potential for significant capital appreciation, diversification beyond traditional asset classes, and professional management.

  4. What are the associated risks?

    In some cases, there is higher volatility, illiquidity, potential for significant capital loss, and limited transparency.

  5. How can I invest in these funds?

    Through financial advisors, investment platforms specializing in alternative investments, or direct with fund managers.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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