SIFs at seven months: baby steps now, broader risk canvas ahead

Being within the mutual fund fold, SIFs enjoy MF-style taxation. Mutual funds are tax-free trusts; profits accrue within the fund. PMS and AIF categories I and II are pass-through for tax purposes.

Sebi permits short positions in SIFs up to 25% of the portfolio. Unlike long-only MFs, SIF managers can benefit from falling stock prices. Like MFs, SIFs can also use derivatives for hedging, reducing volatility during market swings.

Rapid scale-up

The first SIF was launched in October 2025. As per AMFI data, by October 2025 there were four strategies, over 10,000 folios and more than ₹2,000 crore AUM—implying an average ticket size of ₹20 lakh per folio, versus the ₹10 lakh minimum.

By March 2026, the number rose to fourteen strategies, over 44,000 folios and more than ₹10,000 crore AUM. The average ticket size increased to about ₹24 lakh.

Industry data indicates seventeen live strategies plus three NFOs—twenty funds across twelve AMCs. These span equity long-short, hybrid long-short, equity ex-top-100 long-short, active asset allocator and sector rotation. Though SEBI has allowed debt long-short and sectoral debt long-short strategies, launches in debt are yet to emerge.

Conservative play

The funds launched so far are mostly conservative in nature. This conservatism is partially due to the derivative short positions allowed by regulations. While short positions up to 25% of portfolio are permitted, fund managers have used this only to a limited extent, much less than 25%.

This reflects either market movement or fund managers’ reading of market conditions.

The major reason for describing the approach as conservative is the use of derivatives primarily for hedging. When a fund manager takes a short position in a stock already in the portfolio, it reduces volatility during periods of market turbulence.

Net-net, the SIFs available are mostly variants of certain MF categories.

In MFs, there is a category called balanced advantage fund (BAF), where equity exposure is usually more than 65% to make it eligible for equity taxation, and the balance is in debt. Part of the equity exposure is hedged, making BAFs defensive against volatility.

There is another MF category called Equity Savings Fund (ESF), where there is a defined range of unhedged equity, hedged equity and debt.

Most of the SIFs on offer are comparable to, or variants of, BAFs or ESFs. There are relatively aggressive strategies as well, such as equity ex-top-100 funds.

In the initial stage of an industry — SIFs being seven months old — it is prudent to be conservative in approach: baby steps, so to say.

However, going forward, there should be more funds on offer across the risk-return spectrum. This is about expanding the availability basket for investors across the risk-return scale.

Bridging the gap

The initial purpose of the regulator was to create an investment vehicle in the space between MFs and PMS.

The rationale was that certain market participants — for example, stock brokers — offer services of investing money for clients by directly buying stocks, for amounts much lower than ₹50 lakh. In effect, this resembles portfolio management without obtaining a PMS licence from Sebi.

The ₹10 lakh ticket size for SIFs sits squarely in that gap. Arguably, certain high-risk categories may be allowed within SIFs.

The limit on stock exposure is 10% in MFs and SIFs, whereas there is no such limit in PMS. This stock limit may be enhanced by introducing new high-risk categories within SIFs.

Moreover, SIFs cannot take leveraged positions using derivatives — something only Category III AIFs are permitted to do. A calibrated level of leverage, say up to 125% of corpus, may be allowed under a new high-risk SIF category.

Such a category could be targeted at investors who currently gravitate towards PMS for differentiated, high-risk strategies.

Joydeep Sen is a corporate trainer (financial markets) and author