Specialized investment funds: All you need to know about Sebi's new mutual fund category

What sets them apart, and how do they stack up against existing investment options? Here’s a deep dive into everything you need to know.

What are SIFs?

SIFs are specialized investment funds. They are high-risk, high-return versions of traditional mutual funds. An SIF will have a minimum ticket size of ₹10 lakh across all SIFs. 

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For example, you can invest ₹5 lakh in two different SIFs. 

The SIF framework takes effect from 1 April 2025, with the Association of Mutual Funds in India (AMFI) issuing necessary implementation guidelines by 31 March 2025.

What is unique about SIFs?

SIFs stand out with their ability to take naked short positions and leverage through options. Unlike traditional mutual funds, they can set specific withdrawal windows—weekly, monthly, or even quarterly—rather than offering daily liquidity.

Will SIFs displace portfolio management services (PMS)?

No, SIFs will not displace PMS.

PMS are typically long-only investment strategies that differentiate themselves through concentrated bets on select stocks. PMS investments are usually focused on high-conviction, long-term holdings. 

SIFs do not relax the rules around portfolio concentration, meaning PMS strategies will continue to appeal to investors seeking targeted, high-concentration equity exposure.

Who are SIFs competing with?

SIFs primarily compete with Category III alternative investment funds (AIFs) (long-short AIFs).

This is because Sebi has allowed SIFs to take up to 25% naked short exposure. Additionally, by using options, SIFs can achieve significant leverage while maintaining tax efficiency. 

Cat III AIFs have to deduct tax at the marginal rate on trading income—potentially as high as 39%.

What are the different SIF categories?

There are equity, debt and hybrid SIFs. 

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Equity SIFs are allowed to take up to 25% naked derivatives exposure, whereas debt SIFs face no such restriction. 

In the hybrid category, asset allocators and long-short funds have the potential to evolve into ‘absolute return’ funds—strategies designed to deliver consistent returns irrespective of market conditions.

What are the products that can come under SIFs?

Structured products can now be launched via SIFs, bringing back the tax advantage lost when the 2023 budget removed it from market-linked debentures (MLDs). 

Debt-focused SIFs can also be structured to take positions on interest rate movements, such as funds betting on rising rates. In the debt segment, SIFs have specific exposure limits, allowing up to 20% of net asset value (NAV) in AAA-rated securities, 16% in AA-rated securities, and 12% in A-rated or lower securities, with an additional 5% extension permitted through board approval. 

Moreover, absolute return funds, designed to generate returns in any market condition—whether bullish or bearish—can also be structured under SIFs.

How will SIFs be taxed?

SIFs will be taxed similarly to mutual funds. 

Equity SIFs, which maintain more than 65% gross equity exposure, will be subject to a 20% short-term capital gains (STCG) tax and a 12.5% long-term capital gains (LTCG) tax after a one-year holding period. 

Hybrid SIFs, with less than 65% allocation to debt, will be taxed at the investor’s applicable slab rate for STCG, while LTCG will be taxed at 12.5% after a two-year holding period. 

Debt SIFs, regardless of the holding period, will be taxed at the investor’s slab rate.

Who can launch SIFs?

Fund houses eligible to launch SIFs must have a minimum of three years of operation, assets under management (AUM) of at least ₹10,000 crore, and a clean regulatory record with no adverse orders from Sebi. 

Alternatively, fund houses can qualify if they have a fund manager with at least 10 years of experience who has managed an AUM of at least ₹5,000 crore.

Who can sell SIFs?

Distributors who wish to distribute SIFs must clear the NISM (National Institute of Securities Markets) derivatives certification exam. 

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This certification ensures they have a strong understanding of derivative instruments, market regulations, risk management, and structured investment strategies.

What about risk?

SIFs will have their own risk labelling system from Level 1 (least risky) to Level 5 (most risky). They will also need to provide investors with a 'scenario analysis' to explain the risk in them.