SEBI’s Regulatory Framework for Specialised Investment Funds (SIFs): What Investors Should Know

Specialised Investment Funds (SIFs) represent a new asset class introduced by the Securities and Exchange Board of India (SEBI) to create a middle-ground investment option bridging mutual funds (MFs) and portfolio management services (PMS). The regulatory framework for SIFs, effective April 1, 2025, offers investors increased portfolio flexibility with robust regulatory oversight aimed at balancing innovation with investor protection.

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SIFs are SEBI-regulated investment vehicles that cater to semi-sophisticated investors willing to participate in higher risk, strategy-intensive investments. SIFs fall between mutual funds, which attract many retail investors, and portfolio management services, which focus on high-net-worth individuals with custom strategies. They require a minimum investment of ₹10 lakhs from each investor. This minimum amount is meant to ensure that only investors with a certain level of financial knowledge can access these funds.

Eligibility and Setup Criteria for SIFs

Mutual funds registered with SEBI can establish SIFs through two primary routes. The first route requires the mutual fund to have a sound track record, with at least three years of operation and an average asset under management (AUM) of ₹10,000 crores over the past three years. Alternatively, eligibility can be based on experience, where the fund must have key personnel such as a Chief Investment Officer (CIO) with ten years of experience managing ₹5,000 crores in AUM, along with other fund managers having appropriate experience. Each SIF application requires SEBI approval to ensure compliance with the regulatory framework.

Investment Strategies under SIFs

SIFs can use complex investment strategies that involve equity, debt, and hybrid asset classes. Equity strategies may include long-short equity funds and sector rotation funds. Debt strategies consist of long-short debt and sector debt funds. Hybrid strategies mix both asset classes, such as hybrid long-short funds or active asset allocator funds. These strategies enable SIFs to take advantage of market opportunities with more flexibility than traditional mutual funds, while still keeping regulatory protections.

The SEBI framework sets key conditions on SIFs to protect investors and maintain market stability.

• Minimum Investment: Investors need to commit at least ₹10 lakhs across all SIF strategies.
• Risk Management: SIFs use a risk-band system. This system has five levels and is reviewed monthly to manage exposures.
• Exposure Limits: SIFs can hold up to 25% of net assets in exchange-traded derivatives for non-hedging purposes. Gross market exposure cannot exceed 100% of net assets.
• Investment Restrictions: A maximum of 20% can be in AAA-rated debt. Sector concentration is capped at 25%.
• Disclosure: SIFs must provide monthly portfolio disclosures and compare performance with broad market indices.
• Listing Requirements: Closed-ended and interval SIFs must be listed on stock exchanges to improve transparency and liquidity.

Investor Suitability and Protection

Investor protection is a key part of the regulatory framework. SIFs serve semi-sophisticated investors. SEBI requires a clear assessment of investor suitability, similar to what is required under PMS regulations. Fund managers must assess investors' financial goals and risk tolerance before adding them. The new Investment Strategy Information Document (ISID) requires fund managers to share detailed information about investment objectives, the reasons behind their strategy, and risk assessments for various scenarios, including optimal, median, and pessimistic outcomes.

Distinction from Mutual Funds and PMS

SIFs fill an important gap between mutual funds and PMS by offering enhanced portfolio customisation and access to riskier asset classes and strategies without the high minimum investments and bespoke nature of PMS. While mutual funds focus on broad retail participation and regulatory simplicity, and PMS targets high-net-worth individuals with personalised management, SIFs combine elements of both to serve a niche investor base seeking strategic flexibility with regulatory oversight.

Potential Benefits and Risks for Investors

For investors, SIFs provide a way to diversify portfolios with new and flexible investment strategies that are not available in traditional mutual funds. The regulatory protections from risk bands, investor suitability checks, and required disclosures try to reduce the higher risks linked to these strategies.

However, investors should know that SIFs come with higher risk. This includes the possibility of losing capital, increased market exposure through derivatives, and sometimes limited liquidity for closed-ended schemes. It is important to research thoroughly and understand the fund's investment strategy before investing.

Conclusion

SEBI’s rules for Specialised Investment Funds are an important step in improving India’s investment landscape. They offer a regulated option between mutual funds and PMS. These funds give semi-sophisticated investors access to strategy-focused, diverse investment choices along with clear disclosures and strong protections for investors. Those considering SIFs should look at the investment strategy, risk profile, and suitability as outlined in SEBI’s framework, which starts in April 2025. This will help them improve their portfolio while managing possible risks.