Specialised Investment Funds Higher Risk Reward Vs Mutual Fund

March 28, 2025

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India's startup ecosystem has been making headlines, with startups such as in the IT industry getting large investments and demonstrating the potential for rapid growth. Imagine being able to engage in such high-growth sectors without having to manage the intricacies of individual investments.

To bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS), the Securities and Exchange Board of India (SEBI) has introduced a new regulatory framework for Specialized Investment Funds (SIFs), effective April 1, 2025. These funds offer increased flexibility in portfolio construction while maintaining professional management.

Here's an in-depth look at how SIFs differ from mutual funds and their unique advantages.

What are Specialized Investment Funds?

Specialized Investment Funds (SIFs) represent a new category of pooled investment vehicles designed to cater to specific investor classes. Unlike traditional mutual funds, which follow predefined investment structures, SIFs provide greater flexibility in portfolio construction. They serve as an intermediary option between Mutual Funds and PMS, offering investors professional management with a higher degree of customization.

How Does a Specialized Investment Fund Work?

Below are key aspects on how a Specialized Investment Fund works:

1. Eligibility and Fund Setup

A registered mutual fund may launch SIF on fulfilling any of the eligibility criteria of the following routes:

● Route 1 - Sound Track Record:

○ The AMC has been in operation for a minimum of 3 years and has an average asset under management (AUM) of not less than Rs. 10,000 crores in the immediately preceding 3 years.

○ No action has been initiated or taken against the Sponsor/AMC under section 11, 11B and/or section 24 of the SEBI Act, 1992 during the last 3 years.

● Route 2 - Alternate Route:

The AMC must appoint experienced professionals, including:

○ The AMC must appoint A Chief Investment Officer for the SIF with experience of at least 10 years of fund management and has managed an average AUM of not less than Rs.5000 crores.

○ An additional Fund Manager with experience in fund management of at least 3 years and has managed an average AUM of not less than 500 crores.

○ No action has been initiated or taken against the Sponsor/AMC under section 11, 11B and/or section 24 of the SEBI Act, 1992 during the last 3 years.

2. Diverse Investment Strategies

SIFs offer distinct investing approaches across three asset classes:

● Equity-Oriented: Long-short strategies in different market segments.

● Debt-Oriented: Flexible fixed-income strategies.

● Hybrid: Mixed asset allocations tailored to specific risk appetites.

3. Subscription and Redemption Flexibility

Fund structures include:

● Open-ended funds with daily transactions

● Close-ended or interval funds with specific redemption windows

● A minimum investment threshold of ₹10 lakh (except for accredited investors).

4. Advanced Risk Management

Key risk management features:

● Derivative exposure for unhedged positions is limited to 25% of net assets.

● Monthly updated risk band classification to maintain transparency.

Sector-based investment limits to prevent concentration risks.

5. Transparent Branding and Disclosure

Mandatory requirements consist of:

● BrandingBrandingBranding different from traditional mutual funds.

● A separate website that identifies risks and strategies.

● Consistent disclosure of risks and liquidity metrics.

Specialized Investment Funds vs Mutual Funds

While both SIFs and mutual funds pool funds from different participants to invest in a diverse range of assets, they differ greatly in terms of structure, management, and perks.

1. Customization

SIFs: Offer customized portfolios that align with specific investment goals or risk appetites. Investors may have a say in asset allocation or strategy selection.

Mutual Funds: Have a specified investment mandate determined by fund managers. Investors have no control over the makeup of the portfolio selection.

2. Flexibility

SIFs: Have greater flexibility regarding asset classes and investment strategies. They can include alternative investments such as private equity, real estate, and commodities.

Mutual Funds: Typically, invest in traditional asset classes, i.e., equities and bonds, within regulatory limits.

3. Minimum Investment

SIFs: Generally, have a higher minimum investment of ₹10 lakh (except for accredited investors), compared to mutual funds, thereby making SIFs better suited for high-net-worth individuals (HNIs) or institutional investors.

Mutual Funds: Can be easily accessed by retail investors as minimum investments will be lower.

4. Management Style

SIFs: Frequently actively managed with strategies uniquely constructed to bring about certain preferred results.

Mutual Funds: These can be actively or passively managed but generally replicate market indices or themes more broadly.

5. Regulatory Oversight

SIFs are governed under SEBI's new framework, which aims to support transparency while maintaining flexibility within the fund.

Mutual Funds: Highly regulated under strict rules of portfolio construction, risk exposure and consumer protection.

Considerations to Take into Account Before Investing in SIFs

Below are a few things to consider before investing in SIF:

1. Minimum Investment: SIFs are meant for institutional investors, professional investors, and HNIs (High Net-Worth Individuals), as they typically require a minimum investment amount of ₹10 lakh.

2. Risk Tolerance: Since SIFs are usually focused on specific sectors, they expose the investor to higher amounts of risk than a diversified mutual fund. The investor needs to understand their risk tolerance beforehand.

3. Liquidity: SIFs invest in assets that are often illiquid or too complex to allow you to get your investment out quickly.

4. Regulations: It is very important to understand SEBI’s guidelines and the guidelines of the SIF you are looking at before you invest in order to avoid surprises.

Benefits of Specialized Investment Funds

To effectively invest in SIFs, you should have a clear picture of your financial goals and the risk you are willing to accept. Here are some ways to optimize your experience:

1. Clarify Objectives: Determine the exact objectives of your investment: do you want capital appreciation, current income and diversification into a niche market?

2. Understand Risk: As SIFs are often concentrated investments, you should understand your risk tolerances before investing.

3. Utilize Expertise: Work with professional fund managers specializing in areas where you can expect returns.

4. Stay Informed: Monitor the market environment and periodically review your performance against your investment objectives.

5. Diversify Within SIFs: Though SIFs may be specific to a strategy, you can spread risk across specialized SIFs, mitigating the risk of one specific investment or strategy.

Specialized Investment Funds are a more advanced investment product that blends mutual funds and Portfolio Management Services while providing more flexibility and tailor-made strategies that provide access to a multitude of asset classes. They are more suited for High Net-Worth Individuals (HNIs) and institutional investors who handle their portfolios more sophisticatedly. Before investing, prospective investors must fully comprehend their risk tolerance, overall investment goals, and regulatory obligations.

Regulatory Disclaimer (SEBI Compliance):

“Investments in Specialized Investment Funds involve relatively higher risk, including potential loss of capital, liquidity risk, and market volatility. Please read all investment-related documents carefully before making an investment decision.”

By understanding the SEBI framework, investor risks, and fund structures, you can make informed decisions on whether SIFs align with your financial goals.

-Suman Dan

-Dayco India

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Specialised Investment Funds Higher Risk Reward Vs Mutual Fund

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