India's investment landscape is evolving rapidly, with new financial products and vehicles being introduced to cater to sophisticated investors seeking enhanced returns and portfolio diversification.
The Securities and Exchange Board of India (SEBI) has been at the forefront of this evolution, introducing regulatory frameworks that facilitate innovation while ensuring investor protection.
In February 2025, SEBI introduced a groundbreaking addition to India's investment ecosystem—Specialized Investment Funds (SIF). This new investment vehicle is designed to bridge the gap between traditional Mutual Funds (MFs) and Portfolio Management Services (PMS), offering greater portfolio flexibility and specialized investment strategies.
This comprehensive guide explores the regulatory framework, benefits, investment strategies, and key considerations for investors interested in Specialized Investment Funds in India.
Understanding the Investment Landscape in India
The Evolution of Investment Vehicles in India
India's investment management industry has witnessed significant growth and diversification over the years. Starting with traditional Mutual Funds, the industry has expanded to include Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), and now Specialized Investment Funds (SIFs).
The regulatory framework and prudential norms governing these investment vehicles progressively become more flexible from Mutual Funds to Portfolio Management Services to Alternative Investment Funds, aligning with the investment profile and investment size of these products.
Where SIFs Fit in the Investment Ecosystem
SEBI identified a gap between Mutual Funds and PMS in terms of portfolio flexibility, which led to the introduction of the SIF framework. SIFs are designed to provide:
- Greater portfolio flexibility compared to Mutual Funds
- More specialized investment strategies
- Higher minimum investment requirements than Mutual Funds but lower than PMS
- Regulatory oversight while allowing investment innovation
Positioned between Mutual Funds and Portfolio Management Services, SIFs offer a unique value proposition for high-net-worth individuals (HNIs) and sophisticated investors looking for more specialized investment approaches without the higher entry barriers of Alternative Investment Funds (AIFs).
Regulatory Framework for Specialized Investment Funds
SEBI's Circular on SIFs
On February 27, 2025, SEBI released a circular (SEBI/HO/IMD/IMD-PoD-1/P/CIR/2025/26) establishing the comprehensive regulatory framework for Specialized Investment Funds. This framework is an amendment to the SEBI (Mutual Funds) Regulations, 1996, introducing Chapter VI-C specifically for SIFs.
The new regulations come into effect from April 1, 2025, with the Association of Mutual Funds in India (AMFI) required to issue necessary guidelines and standards by March 31, 2025.
Eligibility Criteria for Asset Management Companies (AMCs)
A registered mutual fund may establish an SIF through one of two routes:
Route 1 - Sound Track Record
- Mutual Fund has been operational for at least 3 years
- Average Assets Under Management (AUM) of not less than INR 10,000 crores in the preceding 3 years
- No regulatory actions under SEBI Act, 1992 against the sponsor/AMC during the last 3 years
Route 2 - Alternate Route
- The AMC has appointed a Chief Investment Officer (CIO) for the SIF with at least 10 years of fund management experience and managed an average AUM of not less than INR 5,000 crores
- An additional Fund Manager with at least 3 years of experience and managed an average AUM of not less than INR 500 crores
- No regulatory actions under SEBI Act, 1992 against the sponsor/AMC during the last 3 years
Branding and Marketing Requirements
To maintain a clear distinction between Mutual Funds and SIFs, SEBI has mandated specific branding requirements:
- SIFs must have a distinct brand name and logo, separate from the regular Mutual Fund
- AMCs may use the sponsor's or mutual fund's brand name in SIF materials for up to five years from launch, using phrases like "brought to you by" or "offered by"
- The font size of the sponsor's or Mutual Fund's brand name must be equal to or smaller than the SIF's brand name
- AMCs must maintain a separate website or dedicated webpage for SIFs
- All advertisements must follow guidelines applicable to Mutual Fund schemes
Investment Strategies Under SIF
SEBI has approved several investment strategies that can be launched under the SIF framework, categorized as:
A) Equity Oriented Investment Strategies
- Equity Long-Short Fund
- Minimum 80% investment in equity and equity-related instruments
- Maximum 25% short exposure through unhedged derivative positions
- Equity Ex-Top 100 Long-Short Fund
- Minimum 65% investment in equity and equity-related instruments of stocks excluding top 100 stocks by market capitalization
- Maximum 25% short exposure through derivatives of stocks other than large-cap stocks
- Sector Rotation Long-Short Fund
- Minimum 80% investment in equity and equity-related instruments of maximum 4 sectors
- Maximum 25% short exposure through derivatives, applied at the sector level
B) Debt Oriented Investment Strategies
- Debt Long-Short Fund
- Investment in debt instruments across duration
- Unhedged short exposure through exchange-traded debt derivative instruments
- Sectoral Debt Long-Short Fund
- Investment in debt instruments of at least two sectors, with maximum 75% in a single sector
- Maximum 25% short exposure through derivatives across sectors
C) Hybrid Investment Strategies
- Active Asset Allocator Long-Short Fund
- Dynamic investment across equity, debt, derivatives, REITs/InVITs, and commodity derivatives
- Maximum 25% short exposure through derivatives
- Hybrid Long-Short Fund
- Minimum 25% in equity and equity-related instruments
- Minimum 25% in debt instruments
- Maximum 25% short exposure through derivatives
To prevent proliferation, SEBI has mandated that only one investment strategy can be launched under each category.
Minimum Investment Threshold and Investor Protection
Entry Requirements for Investors
SIFs set a higher entry barrier compared to traditional Mutual Funds:
- Minimum investment of INR 10 lakh (1 million) across all investment strategies at the PAN level
- The minimum investment threshold doesn't apply to accredited investors
- The threshold is exclusive to SIF investments and doesn't include investments in regular Mutual Fund schemes of the same AMC
Systematic Investment Options
AMCs may offer systematic investment options such as:
- Systematic Investment Plan (SIP)
- Systematic Withdrawal Plan (SWP)
- Systematic Transfer Plan (STP)
However, these must comply with the Minimum Investment Threshold requirements.
Monitoring Compliance
AMCs are required to:
- Monitor compliance with the Minimum Investment Threshold daily
- Prevent active breaches due to redemption transactions
- Allow complete redemption if total investment falls below the threshold due to passive breaches (like NAV decline)
Investment Restrictions and Risk Management
Investment Limits
SIFs must adhere to specific investment restrictions:
- Maximum 20% of NAV in AAA-rated debt securities from a single issuer
- Maximum 16% in AA-rated securities and 12% in A-rated and below securities
- Maximum 25% of NAV in debt securities of a particular sector
Derivative Exposure
SIFs have greater flexibility with derivatives compared to traditional Mutual Funds:
- Up to 25% of net assets in exchange-traded derivative instruments for purposes other than hedging and portfolio rebalancing
- Unhedged short exposure through derivatives limited to 25% of net assets
- Total exposure calculated as the sum of cash market and derivatives market exposure
- Offsetting allowed between cash and derivative positions on the same underlying security
Subscription and Redemption Flexibility
Subscription and Redemption Frequencies
SIFs offer multiple subscription and redemption options:
- Frequencies can be daily, weekly, fortnightly, monthly, quarterly, annually, or fixed maturity
- Subscription and redemption frequencies can be distinct from each other (e.g., daily subscriptions with weekly redemptions)
- AMCs can implement notice periods for redemption, not exceeding 15 working days
Listing Requirements
To provide liquidity options:
- Units of all close-ended and interval investment strategies must be listed on recognized stock exchanges
- Strategies with non-daily subscription/redemption are classified as "Interval investment strategies"
Benchmarking and Performance Evaluation
Benchmarking Structure
SIFs follow a single-tier benchmark structure:
- AMCs may optionally provide a second-tier benchmark
- Equity strategies are compared against broad market indices like BSE Sensex or NSE Nifty
- Debt strategies use benchmarks representing the fund's portfolio
- Hybrid strategies use suitable broad market benchmarks where available
Risk Assessment and Disclosure
Risk-Band Framework
SIFs implement a five-level Risk-band to help investors understand potential risks:
- Risk band level 1 (Lowest risk)
- Risk band level 2
- Risk band level 3
- Risk band level 4
- Risk band level 5 (Highest Risk)
The Risk-band is evaluated monthly and disclosed on AMC and AMFI websites within 10 days from the close of each month.
Disclosure Requirements
SIFs must maintain transparency through:
- Portfolio disclosure every alternate month (May, July, September, November, January, March)
- Scenario analysis depicting expected losses due to market movements
- Public availability of all offer documents on the SIF and AMFI websites
- Standard disclaimer on all promotional materials: "Investments in Specialized Investment Fund involves relatively higher risk including potential loss of capital, liquidity risk and market volatility. Please read all investment strategy related documents carefully before making the investment decision."
Comparing SIFs with Other Investment Vehicles in India
SIFs vs. Mutual Funds
| Feature | Specialized Investment Funds | Mutual Funds |
|---|---|---|
| Minimum Investment | INR 10 lakh | As low as INR 100 |
| Investor Profile | HNIs, Sophisticated investors | Retail to institutional |
| Portfolio Flexibility | Higher flexibility with derivatives | Limited derivative use |
| Strategy Options | Specialized long-short strategies | Traditional long-only strategies |
| Redemption Frequency | Variable (daily to quarterly) | Typically daily |
| Risk Level | Generally higher | Ranges from low to high |
| Regulatory Oversight | SEBI regulations under Chapter VI-C | SEBI Mutual Fund regulations |
SIFs vs. Portfolio Management Services (PMS)
| Feature | Specialized Investment Funds | Portfolio Management Services |
|---|---|---|
| Minimum Investment | INR 10 lakh | INR 50 lakh |
| Structure | Fund-based | Portfolio-based |
| Customization | Limited to strategy selection | Highly customizable |
| Investment Restrictions | SEBI-defined limits | More flexible limits |
| Transparency | Standardized disclosures | Varies by provider |
| Tax Treatment | Similar to mutual funds | Different tax treatment |
SIFs vs. Alternative Investment Funds (AIFs)
| Feature | Specialized Investment Funds | Alternative Investment Funds |
|---|---|---|
| Minimum Investment | INR 10 lakh | INR 1 crore |
| Categories | SEBI-defined strategies | Category I, II, III AIFs |
| Liquidity | Higher (daily to quarterly) | Lower (typically locked-in) |
| Target Assets | Primarily listed securities | Listed and unlisted securities |
| Regulatory Flexibility | Moderate | High |
| Fee Structure | Similar to mutual funds | Typically includes performance fees |
Benefits of Investing in SIFs
For High-Net-Worth Individuals (HNIs)
- Access to sophisticated investment strategies with a lower minimum threshold than PMS or AIFs
- Portfolio diversification through long-short strategies
- Potential for better risk-adjusted returns compared to traditional mutual funds
- Regulatory oversight providing investor protection
- Liquidity options through exchange listings
For Asset Management Companies (AMCs)
- Ability to offer more sophisticated products to investors
- Opportunity to expand their investor base
- Revenue diversification through new product offerings
- Ability to showcase fund management expertise in more complex strategies
For the Investment Ecosystem
- Bridges the gap between traditional and alternative investments
- Encourages innovation in investment strategies
- Promotes the development of derivatives markets in India
- Creates a stepping stone for investors moving from mutual funds to more sophisticated investments
Challenges and Considerations
For Investors
- Higher risk profile requiring greater investment understanding
- Increased complexity of investment strategies
- Performance evaluation challenges due to unique strategies
- Potential liquidity constraints with non-daily redemption options
- Tax implications that may differ from traditional mutual funds
For Asset Management Companies
- Need for specialized talent in derivatives and long-short strategies
- Higher operational complexity in managing derivative positions
- Risk management challenges with short positions
- Compliance with stricter disclosure requirements
- Brand differentiation challenges
Future Outlook for SIFs in India
Growth Potential
The introduction of SIFs represents a significant development in India's investment landscape, with substantial growth potential:
- Estimated to attract INR 50,000-75,000 crores in the first three years
- Expected to grow at 25-30% annually as investor awareness increases
- Potential to evolve into a major segment between mutual funds and AIFs
Regulatory Evolution
As SIFs develop, we can expect:
- Introduction of additional investment strategy categories
- Refinement of existing regulations based on market feedback
- International alignment with global best practices
- Enhanced disclosure standards for better transparency
Market Impact
SIFs are likely to influence the broader investment market through:
- Increased derivatives market participation and liquidity
- Greater price discovery in less liquid securities
- Development of specialized fund management talent
- Benchmarking innovations to evaluate complex strategies
How to Invest in SIFs
Eligibility Check
Before investing in SIFs, ensure you meet the following criteria:
- Minimum INR 10 lakh available for investment
- Risk tolerance aligned with the selected strategy
- Investment horizon matching the redemption frequency
- Understanding of the investment strategy's complexity
Strategy Selection
When selecting an SIF strategy:
- Assess your risk tolerance using the Risk-band framework
- Understand the investment approach and underlying assets
- Review the fund manager's experience and track record
- Consider the redemption frequency and liquidity needs
- Evaluate the strategy's role in your overall portfolio
Process for Investment
The investment process typically involves:
- KYC completion with the AMC or distributor
- Strategy selection from available options
- Minimum investment of INR 10 lakh or higher
- Regular monitoring using standardized disclosures
- Redemption as per the strategy's defined frequency
Taxation of Specialized Investment Funds in India
Note: The following information is based on the current tax regime. Consult a tax advisor for the most current and personalized tax advice.
Tax Classification
SIFs are expected to follow a tax treatment similar to mutual funds, with distinctions based on the underlying asset class:
- Equity-oriented strategies: Taxation aligned with equity mutual funds
- Debt-oriented strategies: Taxation aligned with debt mutual funds
- Hybrid strategies: Taxation based on equity exposure thresholds
Capital Gains Tax
For equity-oriented SIFs (with at least 65% in domestic equity):
- Short-term capital gains (held less than 12 months): 15% plus applicable surcharge and cess
- Long-term capital gains (held more than 12 months): 10% above INR 1 lakh, plus applicable surcharge and cess
For debt-oriented SIFs:
- Short-term capital gains (held less than 36 months): Taxed at the investor's income tax slab rate
- Long-term capital gains (held more than 36 months): 20% with indexation benefits, plus applicable surcharge and cess
Dividend Taxation
Dividends from SIFs are taxable in the hands of investors at their applicable income tax slab rates.
Conclusion
Specialized Investment Funds (SIFs) represent a significant evolution in India's investment landscape, bridging the gap between traditional mutual funds and more sophisticated investment vehicles like Portfolio Management Services and Alternative Investment Funds.
With their unique positioning, diverse strategy options, and regulated framework, SIFs offer high-net-worth individuals and sophisticated investors access to complex investment strategies with adequate investor protection. The introduction of long-short capabilities and greater portfolio flexibility has the potential to enhance risk-adjusted returns and provide better portfolio diversification.
As the SIF ecosystem develops, investors can expect continued innovation in investment strategies, improved transparency, and potentially stronger risk-adjusted returns compared to traditional investment vehicles. However, the higher complexity and risk profile require investors to conduct thorough due diligence and align their investment choices with their financial goals and risk tolerance.
For asset management companies, SIFs represent an opportunity to showcase investment expertise and offer more sophisticated products to discerning investors. The success of SIFs will ultimately depend on their ability to deliver consistent performance, maintain transparency, and effectively communicate their value proposition to investors.
With SEBI's balanced approach to regulation—providing flexibility while ensuring investor protection—SIFs are well-positioned to become an integral part of India's investment ecosystem, catering to the evolving needs of India's growing high-net-worth investor segment.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult financial advisors before making investment decisions. The regulations and information mentioned are subject to change, and readers should refer to the latest SEBI guidelines for the most current information.
FAQ: Specialized Investment Funds in India
What is the minimum investment amount required for SIFs?
The minimum investment threshold for SIFs is INR 10 lakh (1 million) across all investment strategies of a SIF at the PAN level.
How do SIFs differ from traditional mutual funds?
SIFs offer more specialized investment strategies, including long-short approaches using derivatives, have a higher minimum investment requirement, and typically target more sophisticated investors compared to traditional mutual funds.
Can retail investors invest in SIFs?
Retail investors who can meet the minimum investment threshold of INR 10 lakh can invest in SIFs, but they should have a good understanding of the more complex investment strategies involved.
What types of investment strategies are available under SIFs?
SIFs offer equity-oriented, debt-oriented, and hybrid investment strategies, including equity long-short funds, sector rotation funds, and active asset allocator funds.
How often can I redeem my investment in a SIF?
Redemption frequency varies by strategy, ranging from daily to quarterly or other intervals as specified in the offer document. Some strategies may also have notice periods for redemption.
Are SIFs regulated by SEBI?
Yes, SIFs are regulated by SEBI under Chapter VI-C of the SEBI (Mutual Funds) Regulations, 1996, with specific guidelines outlined in SEBI circular dated February 27, 2025.
How is the performance of SIFs benchmarked?
SIFs follow a single-tier benchmark structure, with benchmarks selected based on the investment objective and portfolio composition of the strategy.
What are the risks associated with investing in SIFs?
SIFs typically involve higher risks, including market risk, derivative risk, short-selling risk, liquidity risk, and strategy-specific risks. Each SIF is assigned a Risk-band level from 1 (lowest) to 5 (highest) to help investors understand the risk profile.
