SIFs Decoded - How SEBI’s New Category Aims to Transform Wealth Management

Executive Summary:

This briefing document outlines the regulatory framework introduced by the Securities and Exchange Board of India (SEBI) for a new category of investment product called Specialized Investment Funds (SIFs). This new asset class aims to bridge the gap in portfolio flexibility between traditional Mutual Funds (MFs) and Portfolio Management Services (PMS), catering to a segment of investors seeking more advanced investment strategies. The SEBI circular, effective from April 01, 2025, details the eligibility criteria for establishing SIFs, permissible investment strategies, minimum investment thresholds, and various operational and disclosure requirements. The accompanying blog post provides a high-level overview of SIFs as a "higher ticket investment product" for investors seeking advanced strategies.

Main Themes and Important Ideas/Facts:

1. Introduction and Rationale for SIFs:

• The Indian investment management landscape has evolved, leading SEBI to adopt a "segmented risk-based approach to regulation" based on complexity, investor sophistication, and investment size. The current regulatory framework becomes "progressively more flexible from Mutual Funds (‘MFs’) to Portfolio Management Services (‘PMS’) to Alternative Investment Funds (‘AIFs’)."

• A "gap has emerged between MFs and PMS in terms of portfolio flexibility," creating the need for SIFs.

• SIFs are introduced through amendments to the SEBI (Mutual Funds) Regulations, 1996.

• The blog post highlights SIFs as "a new asset class designed for investors looking for advanced investment strategies" and a "higher ticket investment product to meet the needs of the emerging category of investors."

2. Regulatory Framework and Commencement:

• The comprehensive regulatory framework for SIFs is provided in Annexure A of the SEBI circular.
• The circular comes into force on April 01, 2025.
• AMFI will issue necessary guidelines/standards by March 31, 2025.
• Stock Exchanges, Clearing Corporations, and Depositories are directed to take necessary implementation steps and amend their rules.

3. Eligibility Criteria for Establishing SIFs:

• A registered mutual fund can establish an SIF subject to SEBI approval and fulfilling specified eligibility criteria through one of two routes:

• Route 1 - Sound Track Record:Minimum 3 years of operation.

• Average Asset Under Management (AUM) of at least INR 10,000 crores in the preceding 3 years.

• No regulatory action against the sponsor/AMC under specified sections of the SEBI Act in the last 3 years.

• Route 2 – Alternate Route:Appointment of a Chief Investment Officer (CIO) for the SIF with at least 10 years of fund management experience and having managed an average AUM of not less than INR 5,000 crores.

• Appointment of an additional Fund Manager for the SIF with at least 3 years of fund management experience and having managed an average AUM of not less than INR 500 crores.

• No regulatory action against the sponsor/AMC under specified sections of the SEBI Act in the last 3 years.

• AMCs can share resources for operations between their mutual fund and SIF businesses.

• Prior approval from SEBI is required for establishing an SIF.

4. Branding and Advertisement:

• SIFs must have a "distinct identification, separate from that of the Mutual Fund" with a "distinct brand name and distinct logo."
• For an initial period of five years from SEBI approval, the AMC may use the sponsor's or mutual fund's brand name in offer documents and marketing materials using phrases like "brought to you by," "offered by," or similar terms.
• Example: "'XYZ SIF – brought to you by ABC Mutual Fund.'"
• The font size of the sponsor's/MF's brand name must be equal to or smaller than the SIF's brand name.
• Advertisement guidelines applicable to Mutual Fund schemes will apply to SIFs.
• AMCs must maintain a separate website or dedicated webpage for the SIF.

5. Permitted Investment Strategies:

• An "Investment Strategy" is defined as a scheme launched under the SIF.
• SIFs can launch investment strategies following the procedure for mutual fund schemes, but with potential for SEBI to specify the manner.
• The following investment strategies are permitted at this stage:
  • Equity Oriented:Equity Long-Short Fund (min. 80% equity, max. 25% short exposure).
  • Equity Ex-Top 100 Long-Short Fund (min. 65% non-top 100 equity, max. 25% short exposure on non-top 100).
• Sector Rotation Long-Short Fund (min. 80% equity in max. 4 sectors, max. 25% short exposure at sector level).
• Debt Oriented:Debt Long-Short Fund (investment across duration, incl. short exposure via exchange-traded derivatives).
• Sectoral Debt Long-Short Fund (min. 2 sectors, max. 75% in a single sector, max. 25% short exposure across sectors).
  • Hybrid Oriented:Active Asset Allocator Long-Short Fund (dynamic allocation across equity, debt, derivatives, REITs/InvITs, commodities, max. 25% short exposure on equity/debt).
• Hybrid Long-Short Fund (min. 25% equity, min. 25% debt, max. 25% short exposure on equity/debt).
• Only one investment strategy is permitted under each of the aforementioned categories.

6. Minimum Investment Threshold:

• The minimum investment amount from an investor across all SIF investment strategies at the PAN level is INR 10 lakh.
• This threshold applies exclusively to SIF investments and not to regular MF schemes of the same AMC.
• Systematic investment options (SIP, SWP, STP) are permitted while ensuring compliance with the minimum threshold.
• AMCs must monitor compliance daily and prevent active breaches (due to investor-initiated redemptions).
• Passive breaches (due to NAV decline) are not violations, but the investor will only be permitted to redeem the entire remaining amount.
• AMFI will coordinate with exchanges, depositories, and RTAs for active monitoring systems.

7. Investment Restrictions:

• In addition to general MF regulations, SIF investment strategies have specific restrictions:
• Maximum of 20% of NAV in debt/money market securities of a single AAA-rated issuer (lower limits for lower ratings, extendable by 5% with trustee/AMC board approval).
• Maximum of 25% of NAV in debt/money market securities of a particular sector.

8. Investment in Derivatives:

• SIFs can invest in derivatives permitted under mutual fund regulations.
• Investment strategies can take unhedged short exposure of up to 25% of net assets through permissible exchange-traded derivatives, in addition to hedging and portfolio rebalancing.
• Exposure calculation for derivatives is aligned with MF regulations, including futures, options bought, and options sold.
• Total exposure (cash and derivatives) should not exceed 100% of net assets.
• Offsetting of exposure is allowed for cash/derivative positions on the same underlying and between derivative positions on the same underlying.

9. Subscription and Redemption of Units:

• SIF investment strategies can be open-ended, close-ended, or interval schemes.
• Subscription and redemption frequency (daily, weekly, etc.) should be disclosed in the offer document and can be distinct from each other.
• AMCs may implement notice periods for redemption based on the strategy's structure and liquidity risk, with a maximum duration of 15 working days.

10. Listing of Units:

• Units of all close-ended and interval investment strategies of SIFs must be mandatorily listed on recognised stock exchanges.
• Investment strategies with subscription and/or redemption frequency other than daily are classified as "Interval investment strategies."

11. Benchmarking:

• SIF investment strategies will follow a single-tier benchmark structure, with an optional second-tier benchmark.
• AMCs must select appropriate broad market indices as benchmarks based on the investment objective and portfolio.
• Guiding principles for benchmark selection are provided for equity, debt, and hybrid strategies (e.g., BSE Sensex, NSE Nifty for equity).

12. Distribution:

• Entities distributing mutual fund products are also eligible to distribute SIF products, provided their agents/distributors have passed the NISM Series-XIII: Common Derivatives Certification Examination.
• AMFI and AMCs are responsible for ensuring compliance with this requirement.

13. Disclosure Requirements:

• Offer documents must disclose:
• Redemption and subscription frequency.
• Notice period (if any).
• Frequency of portfolio disclosure.
• Scenario analysis for derivative positions.
• Details of derivative investments and maximum limits for non-hedging exposure.
• Liquidity risk management tools and their applicability.
• Other relevant information.
• Portfolio disclosure (including derivatives) will be on the last day of every alternate month (end of May, July, etc.) within 10 days.
• Investment Strategy Information Document (ISID) must include a scenario analysis for potential losses due to market movements (AMFI to prescribe a format).
• All offer documents will be publicly available on the SIF and AMFI websites.
• A standard disclaimer highlighting the higher risks associated with SIFs must be included in all advertisements and promotional materials: "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."

14. Risk-Band:

• Similar to mutual funds, a pictorial "Risk-band" with five levels of risk will depict the potential risk of SIF investment strategies.
• AMFI, in consultation with SEBI, will issue detailed standards for the Risk-band by March 31, 2025.
• SIFs will assign a risk level at the time of the New Fund Offer (NFO).
• Changes in the risk band will be communicated via Notice cum Addendum and email/SMS to unitholders.
• The Risk-band will be evaluated monthly and disclosed on AMC and AMFI websites within 10 days of month-end.
• Annual disclosure of the risk level as of March 31st and the number of risk level changes during the year is required.

15. Illustration on Derivative Exposure (Annexure A1):

• Provides examples of maximum exposure limits for derivative positions (e.g., maximum 25% unhedged short exposure).
• Illustrates possible portfolio compositions using derivatives for long and short positions.
• Details scenarios for offsetting derivative transactions on the same underlying security with the same expiry date.

Conclusion:

The introduction of Specialized Investment Funds represents a significant development in the Indian mutual fund industry, aiming to provide more sophisticated investment options with greater portfolio flexibility to a specific segment of investors. The regulatory framework laid out by SEBI addresses key aspects such as eligibility, investment strategies, risk management, and disclosures, ensuring a structured and transparent environment for this new asset class. AMCs and market participants need to prepare for the implementation of these regulations by the effective date of April 01, 2025.