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Starting April 1, 2025, fund houses will begin submitting draft offer documents to launch their SIFs. These funds are designed as long-short strategies and are expected to have a tax structure similar to mutual funds.
Unlike AIF-managed long-short funds, which can unhedge their positions entirely and use leverage, SIFs can only unhedge up to 25% without any leverage.
An AIF manager, speaking anonymously, noted that while long-short AIFs have the flexibility to fully unhedge, many of them currently limit their unhedged positions to around 20%. "I don’t see SIFs as just a 25% version of long-short AIFs. In fact, they are a superior alternative. I believe SIFs will eventually replace long-short AIFs entirely," he stated.
Sunil Rohokale, MD and CEO, ASK Asset and Wealth Management feels that inflows in category III will be affected due to favourable taxation in SIFs. “While the SIFs will be taxed in line with mutual funds unlike Cat III AIFs, one aspect that needs clarification in implication of section 10 (23B) i.e. implication of taxation on buying and selling of derivative by mutual funds. Currently, derivative trading attracts the marginal rate taxation. However, if mutual funds are allowed to trade in derivatives without incurring any tax, it is win-win for them.”
Rohokale further said that while SIFs appear to be more tax efficient, long and short funds still have some merits. “Long and short funds are allowed to do leveraging and unhedged their portfolio by 100%, which is not the case with SIFs.”
Nalin Moniz, CEO - Ionic Asset Management; says that SIFs will become very popular in a short span of time. He said, “While there will be no impact of SIFs on long only funds and PMS, it will affect long/short funds. SIFs are tax efficient with better regulatory oversight and risk management framework.”
Kolkata MFD Vikash Baid, Managing Partner, Trust Capital LLP feels that SIFs will be a game changer for the MF industry if it gets favourable tax treatment. “In my view, the government is yet to issue clarity on taxation. However, if it gets mutual fund taxation then the category will receive huge inflows from existing long and short funds run by AIFs. The MF industry may get inflows of Rs.50,000-Rs.1 lakh crore in SIFs in the first six months. Also, the minimum ticket of Rs.10 lakh will create a multiplier effect on the growth of SIFs”
Another key aspect of SIFs is that the bank FD money could come to SIFs. “Long and short fund is an arbitrage plus fund. MFDs can reach out to FD investors to park their money in SIFs for two-three years to get better risk adjusted returns,” he added.
Please note that MFDs will have to appear for NISM Series-XIII: Common Derivatives Certification Examination to sell SIFS. AMFI is likely to issue a license to distribute SIFs.
