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What are SIFs?
SEBI has recently introduced a new asset class called Specialized Investment Fund (SIF). SIFs are a product class that has more flexibility than a regular mutual fund scheme and lower ticket size than PMS and AIFs.
The minimum investment amount for investors in SIF is Rs. 10 lakh. This asset class will have TER structure like mutual funds and will be subjected to single issuer limits.
What kind of products will be there in SIFs?
To start with, SEBI has allowed fund houses to launch long-short equity funds under the new SIF framework.
Long-short funds is the oldest and most common hedge fund strategy. Similar to Category III AIFs, the long-short equity funds can take two positions – long (buying) and short (selling) simultaneously. For instance, if a fund manager is bullish on the IT sector and bearish on the banking sector, he can invest in the IT sector by shorting stocks from the banking sector.
Simply put, long-short funds take a long position in undervalued stocks while selling short overpriced shares. By doing this the fund manager makes money irrespective of market movements. These funds are similar to hedge fund lite, which is available in US markets for retail investors.
What are the types of SIFs?
| Asset class | SIFs | Characteristics | Taxation | Redemption frequency |
| Equity | Equity Long -Short Fund | At least 80% in equity and up to 25% in unhedged derivative position in equity | Equity | Daily |
| Equity Ex-Top 100 Long-Short Fund | At least 65% in stocks beyond top 100 companies and up to 25% in unhedged derivative position in equity | Equity | Daily | |
| Sector Rotation Long-Short Fund | At least 80% in shares of up to 4 sectors and up to 25% in unhedged derivative position in equity | Equity | Daily | |
| Debt | Debt Long-Short Fund | Invest in debt securities across duration including unhedged short exposure through debt derivatives | Debt | Once in a week |
| Sectoral Debt Long-Short Fund | Invest in debt securities of at least two sectors with up to 75% in single sector and up to 25% in unhedged short exposure through debt derivatives | Debt | Once in a week | |
| Hybrid | Active Asset Allocator Long-Short Fund | Invest in equity, debt, equity and debt derivatives, REITs/InvITs and commodity derivatives and upto 25% in unhedged derivative position in equity and debt instruments | Depending on product structure | Twice in a week |
| Hybrid Long-Short Fund | Invest 25% each in equity, debt and equity and debt derivatives | Depending on product structure | Twice in a week |
Notes:
AMCs can launch only one scheme per category
Redemption frequency can be reduced depending on the AMCs’ policy
How to understand the concept of minimum investment amount?
The minimum investment limit of Rs.10 lakh is at the AMC level. For instance, if an AMC has 7 schemes across SIF categories, investors may choose to invest Rs.1.43 lakh in each scheme.
However, if an investor chooses to invest in only one SIF, she has to put the entire Rs.10 lakh in one scheme.
Please note that the minimum investment limit will be calculated at the AMC level. If an investor wants to invest in two SIFs of different fund houses, the applicable limit for each fund house will be Rs.10 lakh.
These limits will not be applicable for accredited investors.
Further, fund houses will allow switch transactions like SIPs, STPs and SWPs only after a minimum investment limit of Rs.10 lakh. For instance, if an investor invests Rs.3.50 lakh across three SIFs of an AMC, they can do SIPs in all three SIFs as the aggregate investment amount crosses the threshold limit of Rs.10 lakh.
How will redemption happen if the minimum threshold limit is Rs.10 lakh?
AMCs will have to ensure that the minimum investment threshold of Rs.10 lakh should be maintained throughout the investment cycle of investors. While active breach will not be allowed i.e. amount going down below Rs.10 lakh due to partial redemptions, passive breach due to market movement is allowed.
However, investors can redeem their investment based on the redemption frequency cycle of an AMC in full if their investment amount is less than Rs.10 lakh.
Who can launch SIFs?
SEBI has allowed two routes to launch SIFs – Sound track record and alternate route.
Sound track record
AMCs having AUM of at least Rs.10,000 crore in immediately preceding 3 years can launch SIFs. However, AMCs launching SIFs should not be facing any litigation during the last 3 years. Our analysis shows that 20 fund houses fit under this criteria.
Alternate route
AMCs will have to appoint a CIO having experience of 10 years and who has managed AUM of at least Rs.5000 crore. Another requirement is appointment of an additional fund manager having at least 3 years of experience and has managed AUM of Rs.500 crore. Also, no action should be taken against the sponsor/AMC during the last 3 years.
Who can distribute SIFs?
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.
What will SIFs look like?
SIFs will have to clearly differentiate itself from the mutual fund business. That means, AMCs will have to give distinct brand name and distinct logo. For instance, XYZ Mutual Fund can create XYZ SIF with different logo.
Also, fund houses will have to launch a separate website for SIF.
Further, SEBI has asked AMFI to develop a 5-risk band level in SIFs with risk level 1 considered as lowest risk and risk level 5 as highest risk.
Also, SIF should carry a standard disclaimer, “Investments in Specialized Investment Fund involves relatively higher risk including potential loss of capital, liquidity risk and market volatility. Please read all investment strategy related documents carefully before making the investment decision.”
What is an expert's take on SIFs?
Sunil Subramaniam of SenseandSimiplicy feels that SIFs are 25% of Cat III AIFs. “Fund houses are allowed to take an unhedged position of up to 25% in SIFs whereas Cat III AIFs do not have any restriction on unhedged positions.”
Sunil says that SIFs will help investors who cannot invest in Cat III AIFs due to high ticket size. Also, it will help the derivatives industry to raise capital from the institutional route.
Sunil believes that the performance of SIFs will depend on the fund manager’s capability to leverage the hedging position. “Equity long-short funds are 75% long only and 25% unhedged derivatives. Now, the fund manager has two choices: either to use derivatives aggressively by backing his conviction ie by taking long positions on some stocks/and short on some others to try to deliver healthy absolute returns or hedge his position by shorting another stock in the same sector to safeguard the investment portfolio,” he added.
