SIFs Promise Sophistication, But Risk Being The Emperor’s New Clothes

The Securities and Exchange Board of India’s new Specialised Investment Funds sound like a grand idea soured in implementation. The regulator designed SIFs to bridge the gap between mutual funds and Portfolio Management Services or Alternative Investment Funds by lowering the entry ticket to ₹1 million. That looked like a promising move to attract investors priced out of the ₹5 million or ₹10 million thresholds for PMS and AIFs, offering them non-traditional exposure in equities and fixed income.

But the excitement did not last long. Advisers and investors had hoped SIFs would deliver the sort of innovation seen in PMS: equity themes, unlisted stocks, pre-IPOs, or blended styles combining value, growth and momentum. Instead, SEBI rolled out a framework focused on advanced hedging strategies—long-short positions, allocations to REITs, private credit and Infrastructure Investment Trusts—offered in open-ended, close-ended and interval formats, and targeted at investors with higher risk appetites.

Are SIFs truly a game-changer? It is far from clear. The framework introduces products with greater volatility and leverage—up to 25%—but much of that exposure is to asset classes already accessible through multi-asset mutual funds.

To complicate matters, only mutual funds with a track record and minimum AUM can launch SIFs. That shuts out some of the most nimble PMS players who, ironically, created the demand for this lower threshold in the first place.

SEBI has also capped SIF allocations: debt, including illiquid, high credit-risk paper, and REIT exposure is limited to 20%, with single-security exposure capped at 15%. That is higher than the 10% cap in regular mutual funds, but still restrictive. Worse, for fixed-income strategies, SIFs can push single-instrument exposure to 25% with board approval, making them more vulnerable to credit risk, which tends to hit like a tsunami every few years in India.

On paper, SIFs promise sophisticated hedging strategies—going long and short, using complex derivatives and structured products. In practice, that is where investor reservations grow. Many long-short mutual funds and AIFs in India have a chequered record, with returns often dipping below 10% over five years. Some celebrated long-short offerings from Ambit and Avendus have even folded because of sustained underperformance.

The problem is fundamental. Long-short funds aim for market-neutral returns by balancing buying and selling positions, sometimes even in the same security. The theory is sound in deep and liquid markets. But India’s derivatives market is shallow, with limited volume. Even before the Jane Street effect, short positions here have always been a gamble that rarely pays reliably.

Meanwhile, the case for long-only equity exposure remains strong. The Nifty and Sensex have delivered average annual returns of over 13%. Historical data shows that over periods of seven years or more, long-only investors have never seen negative returns. By contrast, a fund with an obligatory short leg risks dragging down returns precisely because of India’s long-term growth and bullish equity market structure.

That structural mismatch makes SIFs vulnerable to underperforming good old mutual funds that simply take a one-way bullish call on equities.

To be fair, SIFs do have an edge over PMS in taxation. They’re treated like mutual funds—20% for short-term gains, 12.5% for long-term gains—and come with the same transparency standards. Advisers must also pass a new NISM certification before recommending them, offering some guardrails for investors.

But let’s not ignore the incentives for AMCs. For them, SIFs are a goldmine: they can charge a Total Expense Ratio of 2% on assets up to ₹2.5 billion, just like in mutual funds, while also churning out new fund offers to ramp up AUM—addressing the perennial growth challenge in the industry.

For now, HNIs, institutional investors and sophisticated retail investors technically have the go-ahead to bite into SEBI’s latest offering. But the early response has been lukewarm. The target audience was expecting a much richer menu of truly alternative investments, not a façade of market-neutral strategies and partial exposure to real estate and infrastructure trusts already available elsewhere.

In the end, SIFs risk being as exciting as the Emperor’s new clothes—touted as a sophisticated innovation but offering little that is truly new or valuable. Whether they can ever get as sexy for India’s wealthy investors as SIPs did for the retail crowd remains to be seen.