Understanding SEBI’s Specialized Investment Funds (SIFs)
1. What exactly is a Specialized Investment Fund (SIF) and why has it been introduced?
A Specialized Investment Fund (SIF) is a new category of investment product in India, introduced by SEBI to bridge the gap in portfolio flexibility between traditional Mutual Funds (MFs) and Portfolio Management Services (PMS). The regulatory framework for SIFs is designed to be more flexible than that for MFs but potentially less so than for Alternative Investment Funds (AIFs), aligning with the investment profile and size of these products. The introduction of SIFs aims to cater to investors seeking more advanced investment strategies than typically offered by MFs, with a higher minimum investment threshold.
2. What are the eligibility criteria for a Mutual Fund to establish a SIF?
A registered Mutual Fund can establish a SIF if it meets certain eligibility criteria under one of two routes. Route 1, the "sound track record" route, requires the Mutual Fund to have been in operation for at least three years with an average Asset Under Management (AUM) of not less than INR 10,000 crores in the preceding three years, and no regulatory action taken against the sponsor/AMC in the last three years. Route 2, the "alternate route", requires the AMC to appoint a Chief Investment Officer (CIO) for the SIF with at least 10 years of fund management experience and having managed an average AUM of at least INR 5,000 crores, along with an additional Fund Manager for the SIF with at least 3 years of experience and having managed an average AUM of not less than INR 500 crores. Additionally, no regulatory action should have been taken against the sponsor/AMC in the last three years under this route either.
3. What are the permitted investment strategies that can be launched under a SIF?
At this stage, SEBI has permitted three broad categories of investment strategies under SIF: Equity Oriented, Debt Oriented, and Hybrid. Within each category, specific types of strategies are allowed, such as Equity Long-Short Funds, Equity Ex-Top 100 Long-Short Funds, Sector Rotation Long-Short Funds under Equity; Debt Long-Short Funds and Sectoral Debt Long-Short Funds under Debt; and Active Asset Allocator Long-Short Funds and Hybrid Long-Short Funds under Hybrid. Only one investment strategy is permitted to be launched under each of these defined sub-categories to prevent a proliferation of strategies.
4. What is the minimum investment amount required to invest in a SIF, and are there any exceptions?
The minimum investment threshold for a SIF is INR 10 lakh across all investment strategies offered by that SIF at the Permanent Account Number (PAN) level. This threshold applies exclusively to SIF investments and does not include investments in regular MF schemes of the same AMC. However, this minimum investment requirement does not apply to accredited investors. While the minimum threshold needs to be maintained, AMCs can offer systematic investment options like SIP, SWP, and STP for SIF schemes.
5. What are the regulations regarding the use of derivatives in SIF investment strategies?
SIFs are permitted to invest in eligible exchange-traded derivative products. Investment strategies can take an exposure of up to 25% of their net assets in permissible exchange-traded derivative instruments for purposes other than hedging and portfolio rebalancing. This allows for taking unhedged short positions. The circular provides specific methodologies for calculating exposure to different types of derivative contracts (futures and options). Importantly, the cumulative gross exposure through equity, debt, derivative positions, repo transactions, and credit default swaps should not exceed 100% of the net assets of the investment strategy. Offsetting of exposure is allowed under specific conditions for positions on the same underlying security.
6. How will the subscription and redemption of units work for SIF investment strategies?
Investment strategies under SIFs can be open-ended, close-ended, or interval-based, with the subscription and redemption frequency disclosed in the offer document. The frequency can vary based on the nature of investments and liquidity management needs, and the subscription frequency can be different from the redemption frequency. For investment strategies other than daily redemption, AMCs may implement notice periods for redemptions, with a maximum duration of 15 working days. To provide an exit option, units of all close-ended and interval investment strategies of SIFs must be listed on recognised stock exchanges.
7. How will the performance and risks of SIF investment strategies be communicated to investors?
SIF investment strategies will follow a single-tier benchmark structure, with AMCs having the discretion to provide a second-tier benchmark. The benchmark should be a suitable broad market index reflecting the investment objective and portfolio. Similar to Mutual Funds, SIFs will use a pictorial "Risk-band" with five levels to depict the potential risk associated with their investment strategies. The risk-band will be evaluated monthly and disclosed on the AMC and AMFI websites. Any changes in the risk band must be communicated to unitholders. Offer documents will include detailed disclosures, including redemption/subscription frequency, notice periods, portfolio disclosure frequency, scenario analysis for derivative positions, and a standard risk disclaimer highlighting the relatively higher risks involved in SIF investments.
8. Who is eligible to distribute Specialized Investment Funds?
Entities already engaged in the sale and/or distribution of Mutual Fund products are also eligible to offer SIF products. However, to do so, the individuals involved must have passed the National Institute of Securities Markets (NISM) Series-XIII: Common Derivatives Certification Examination. AMFI and the AMCs are responsible for ensuring that their agents and distributors comply with this requirement.
