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SEBI has recently allowed fund houses to launch SIFs. How will it shape the future of the investment management industry?
SEBI’s recent introduction of Specialized Investment Funds (SIFs) represents a pivotal development in the Indian investment landscape. By providing access to specialized investment strategies for sophisticated investors, SIFs offer a differentiated investment offering and portfolio enhancement.
They are positioned to bridge the gap between mutual funds and portfolio management services and aim to provide investment strategies to HNIs seeking a regulated investment product featuring higher risk-taking capabilities.
What are the opportunities for MFDs in these SIFs?
MFDs today cater to various segments of the market, including MNI, HNI, and UHNI segments. MFDs can tap into SIFs as a growing opportunity, given the increasing demand for tailored investment solutions. SIFs offer a more targeted approach, focusing on sectors that may not be accessible through other investment channels. Some of the key opportunities that distributors can unlock are as follows:
- With a minimum investment threshold of Rs.10 lakh, SIFs make advanced investment options more accessible to investors who do not want to allocate large amounts of money to a single manager of PMS or AIF but would like to participate in differentiated strategies. MFDs can leverage this opportunity to expand their client base by targeting HNIs interested in diversification and a deeper comprehension of the markets.
- SIFs encompass a range of strategies like equities, debt instruments, hybrid investments , allowing MFDs to offer products that align with clients' investment objectives. This diversification can enhance the value proposition of MFDs.
- Under these regulations, all distributors who wish to sell these products need to undergo additional certification – NISM Series-XIII : common Derivatives Certification Examination, which helps them become better informed and more knowledgeable. The complexity of SIFs necessitates informed services. MFDs can position themselves as essential consultants, guiding clients through the intricacies of these funds and tailoring investment strategies to individuals seeking more personalized and diversified alternatives.
What are the key risks associated with SIFs?
SIFs focus on niche markets and alternative investments, which can be inherently riskier than traditional assets. Understanding one's risk tolerance is crucial before investing in funds with potentially higher volatility and less predictable returns.
SIFs will offer unique features like up to 25% of the net assets in permissible exchange traded derivatives instruments for purposes beyond hedging and portfolio rebalancing, with risk classified into five levels (Risk Band 1 to 5) and monthly reviews. Hence, SEBI requires that only certified distributors be authorized to sell SIFs.
Certain strategies launched under SIFs may have limited liquidity due to their focus on alternative investments. Before investing, it is advisable to understand the fund’s redemption policies, lock-in periods, and exit options, etc.
Regarding fixed-income categories of products, the concentration in a single holding is higher compared to mutual funds. This can also impact the liquidity of the portfolio.
Overall, both fixed-income and equity products under SIFs would have higher risk compared to traditional mutual fund products, which may have the potential to provide benefits for customers over time.
How will HSBC MF train their distributors and educate investors about SIFs?
All distributors who wish to sell these products need to obtain a separate certification – NISM Series-XIII: common Derivatives Certification Examination. Thus, for the first level of training, we will work on facilitating certification for interested individuals.
HSBC Mutual Fund has a history of conducting educational workshops and training programs for distributors. HSBC MF conducts education workshops across various locations to enhance awareness and understanding of various aspects. It is plausible that HSBC MF will integrate SIF-specific content into these existing programs to ensure distributors are well-informed about the nuances of SIFs and are well-prepared before addressing their clients.
Where do SIFs fit into clients' portfolios?
SIFs can play a strategic role in a client’s portfolio. They are intended for investors with a greater tolerance for risk and a deeper comprehension of the markets. These funds offer a creative compromise for those who have outgrown the risk-return profiles of mutual funds but do not fit PMS's high investment requirements by combining the accessibility of mutual funds with the customized strategies of PMS.
SIFs cater to high-net-worth individuals and sophisticated investors seeking unique investment opportunities which are different from mutual funds, offer potential higher returns commensurate with potentially higher risk profile and strategies with volatility lower than typical mutual funds. Being a unitized structure, there is a standard portfolio for all customers, unlike PMS. However, as a unitized structure, any tax liability to the customer arises only when the customer makes a transaction and not when SIF churns the portfolio, making it more tax-efficient compared to PMS.
What are the three things that MFDs should know about SIFs to recommend it?
SIFs open doors to specialized asset classes and can be considered an intermediary between PMS and mutual funds. This initiative aims to provide investors access to sophisticated investment strategies, such as long-short equity, derivative-based plans, which were previously available only through AIFs requiring a minimum investment of Rs 1 crore.
With SIFs, investors can participate with a lower minimum investment of Rs.10 lakh, making advanced investment opportunities more accessible. They seek to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorized investment products.
SIFs taxation for investors will be akin to mutual fund schemes taxation. The expense structure will also be similar to that of mutual funds, making it a low cost, transparent and efficient way of accessing sophisticated investment strategies
