Market regulator, the Securities Exchange Board of India (SEBI) has launched a new asset class between portfolio management service (PMS) and mutual funds "Specialized Investment Fund (SIF)", with a minimum investment of Rs. 10 Lakh, designed for high-risk investors seeking advanced and flexible investment options. The initiative aims to bridge the gap between mutual funds and portfolio management services while ensuring robust risk management and investor protection. SIFs are designed for those who are more informed about the market, willing to take on a higher level of risk for the potential of higher rewards.
"Specialized Investment Fund (SIF)" - A New Asset Class launched by SEBI on 17th Dec 2024
SIFs open up new opportunities for HNIs and portfolio managers, offering enhanced flexibility and broader investment horizons. SIFs as a unique offering that combines features of mutual funds and PMS. These funds offer a regulated alternative with built-in investor protection measures.
This newly launched class aims to fill the space between mutual funds and PMS, offering a flexible and specialized option for investors who are willing to make riskier bets and seek higher returns.
SIFs allow asset management companies (AMCs) to offer innovative investment strategies. These funds can be structured as open-ended, closed-ended, or interval funds, providing flexibility in portfolio construction.
These investment strategies could include exposure to equity, debt, real estate investment trusts (REITs) or derivatives like futures and options (F&O).
This would mean that depending on the individual strategy chosen by the asset management company (AMC), an SIF could offer a higher risk, higher return profile compared to a regular equity fund.
The demand for a SIF-like product has long been pending, as investors have sought a product that offers something more advanced than a regular mutual fund but is more affordable than PMS, which offers exotic strategies but keeps the minimum investment threshold at Rs 50 lakh per investor.
The SIF will also be structured like a mutual fund, offering similar investment and redemption procedures and similar tax treatment for both the end investor and the fund company managing the assets.
Over time, PMSs have evolved to become complex products, especially for the AMC, as they manage each investor's portfolio individually.
To safeguard investor interest, SEBI has imposed certain limitations on the SIF, such as a maximum of 10% investment in any one listed company at the fund level and 20% for any issuer of debt security. However, government securities (G-Secs) and treasury bills (T-bills) are exempt from the restrictions. Fund managers managing the SIF will need to be certified by the "National Institute of Securities Market (NISM)".
The structure of the SIF will allow the fund manager to pursue not only strategies seeking excess returns through bolder investment bets or exotic derivative strategies but also optimizing the risk-return profile by seeking exposure to a more diversified asset exposure depending on the market environment.
Since SIFs will follow a mutual fund structure, their fee structure will operate within the framework defined for mutual funds. The fees and expenses for the investment strategies under SIF will be per Regulation 52 of the mutual fund regulations.
Who can benefit?
a) High-Net-Worth Individuals(HNIs):
SIFs are tailored for experienced investors with significant capital and a higher risk appetite.
b) Advanced investors:
Those looking for more sophisticated strategies and broader exposure limits can benefit from this product.
c) Portfolio managers:
SIFs offer flexibility to create innovative, customized products, enabling strategies that traditional mutual funds cannot accommodate.
Key features of SIFs
a) Equity:
For equity investments, the cap on single-company exposure is set at 10% of the total assets. However, the ownership limit for a company has been raised to 15%, a notable advantage for SIFs over traditional mutual funds, which could allow for more substantial positions in high-growth companies.
b) Fixed-income strategies(Debt Instruments):
No SIF can allocate more than 20 per cent of its net asset value (NAV) to debt instruments issued by a single issuer, which are not rated below the investment grade. However, the 20 per cent rule doesn't apply if the strategy invests in government securities and treasury bills. This limit can also be extended to 25 per cent with prior approval from the Board of Trustees and the asset management company's Board of Directors.
c) Investment limits for REITs and INVITs:
SIFs can allocate up to 20% of their assets to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs), but they cannot invest more than 10% in any single issuer. This provides a level of diversification while still allowing for targeted exposure to real estate and infrastructure sectors.
Transparency and Risk Management in SIFs:
SEBI ensures clear differentiation between SIFs and mutual funds with distinct branding and strict risk controls.
a) Innovation potential:
AMCs can launch specialized products aligned with investors’ unique financial goals and risk tolerance.
b) Addressing market gaps:
SIFs aim to reduce the proliferation of unregistered and unauthorized investment schemes that promise unrealistic returns.
SEBI mandates that AMCs (Asset Management Companies) offering SIFs must have strong internal controls, risk management systems, and the right expertise to ensure the funds are managed responsibly. This is to prevent any overexposure or mismanagement that could undermine the performance of the fund.
SEBI's instructions for AMCs:
SEBI has further directed asset management companies (mutual fund houses) to clearly distinguish SIFs from mutual funds through branding, advertising, disclaimer guidelines and by maintaining separate websites for the two investment options. SEBI mandates that AMCs (Asset Management Companies) offering SIFs must have strong internal controls, risk management systems, and the right expertise to ensure the funds are managed responsibly. This is to prevent any overexposure or mismanagement that could undermine the performance of the fund.