Specialized Investment Fund Framework: All You Need to Know About SEBI’s New Asset Class

With this new investment product, known as Specialized Investment Fund (SIF) , SEBI aims to address a growing demand from investors who feel limited by the traditional options of mutual funds and PMS (Portfolio Management Services). While mutual funds offer diversification and professional management, they often lack the customisation that some investors desire. PMS, on the other hand, requires a large capital commitment, which proves to be a barrier for many retail investors. Moreover, PMSs are not tightly regulated by SEBI when compared to mutual funds.

[Read: PMS v/s Mutual Funds: Why the Latter is Better for Investors]

Thus, SIFs will combine the diversified approach of mutual funds with the active management strategies of PMS, offering investors a balanced solution that optimizes both risk and returns. Moreover, unlike PMS, which typically requires a minimum investment of Rs 50 lakh, the new asset class will have a lower entry threshold, making it accessible to a larger pool of investors.

SEBI has now released a detailed framework that mutual funds looking to establish Specialized Investment Fund will have to fulfil. This new framework will come into effect from April 01, 2025. The Association of Mutual Funds in India (AMFI) will issue necessary guidelines and facilitate implementation by March 31, 2025. Stock exchanges and clearing corporations will also update their rules accordingly.

1) Eligibility Criteria

AMCs will be eligible to establish SIF if they have been in operation for a minimum period of 3 years and have an average asset under management (AUM) of at least Rs 10,000 crore in the past 3 years. Alternatively, if they don't fulfil the first criteria, the AMC may appoint a Chief Investment Officer (CIO) for the SIF with at least 10 years of experience in fund management and managing an average AUM of Rs 5,000 crore.

AMCs will have to ensure that the SIF has a distinct brand name and logo, separate from that of its regular mutual fund.

In terms of the distribution of products under SIF, an entity engaged in the sale and/or distribution of Mutual Fund products, will also be eligible to offer products under the SIF, subject to such entity having passed National Institute of Securities Markets (NISM) Series-XIII: Common Derivatives Certification Examination.

2) Investment Strategies

The offerings under SIF will be termed 'Investment Strategies,' clearly distinguishing them from traditional mutual fund schemes. SEBI has permitted SIFs to launch the following investment strategies under equity-oriented investments:

a) Equity Long-Short Fund - These funds will invest a minimum of 80% in equity and equity related instruments and maximum 25% in short exposure through unhedged derivative positions in equity and equity related instruments.

b) Equity Ex-Top 100 Long-Short Fund - These funds will invest at least 65% of their assets in equity and equity related instruments of stocks excluding top 100 stocks by market capitalization with maximum 25% in short exposure in equity through derivative instruments of stocks other than large-cap stocks.

c) Sector Rotation Long-Short Fund - These funds will invest at least 80% of their assets in equity and equity related instruments of maximum 4 sectors with maximum 25% short exposure in equity through derivative instruments of maximum four sectors.

In the case of debt-oriented strategies, SIF will be able to launch Debt Long-Short Fund and Sectoral Debt Long-Short Fund. For Hybrid strategies SEBI has permitted Active Asset Allocator Long-Short Fund and Hybrid Long-Short Fund.

3) Minimum Investment Threshold

The AMCs have to ensure that the aggregate investment by an investor across all investment strategies offered by the SIF, at the Permanent Account Number (PAN) level, is not less than Rs 10 lakh. The AMCs can offer systematic investment options such as Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) for investment strategies launched under the SIF, while ensuring compliance with the minimum investment threshold.

4) Subscriptions and Redemptions

AMCs may launch SIF as an open-ended investment strategy or close-ended investment strategy or interval investment strategy, with subscription (purchase) and redemption frequency appropriately disclosed in the offer document. Depending on the nature of investments, the subscription and redemption frequency under SIF can be daily, weekly, fortnightly, monthly, quarterly, annually, fixed maturity, or other suitable intervals. The SIF can appropriately decide the frequency of subscription and redemption to allow fund managers to adequately manage liquidity of the fund. The subscription frequency and redemption frequency of an investment strategy maybe distinct from each other.

5) Listing of units

To provide an exit option for the redeeming investors, the units of all close ended and interval investment strategies of SIF will have to be mandatorily listed on recognized stock exchange/s. For the purpose of SIF, investment strategies with subscription and/or redemption frequency other than daily will be classified as 'Interval investment strategies'.

6) Benchmarking of investment strategies

The investment strategies of SIF will follow a single-tier benchmark structure. The AMCs will appropriately select any of the broad market indices available, as a benchmark index depending on the investment objective and portfolio of the investment strategy. Accordingly, equity-oriented investment strategies will be compared against a suitable broad market index such as the BSE Sensex, NSE Nifty, BSE 100, or NSE 500, etc. Similarly, debt and hybrid strategies will be compared with a suitable broad market index that is representative of the fund's portfolio

7) Disclosure in Offer Documents

The following information will be disclosed in the offer documents of SIF to enable investors to make an informed decision:

• Redemption and subscription frequency of the investment strategy

• Notice period of the investment strategy, if any

• Frequency of portfolio disclosure

• Scenario analysis for derivative positions

• Disclosures regarding investment in derivatives along with the maximum limit on investment in derivatives for other than hedging and portfolio rebalancing exposure

• Disclosure of liquidity risk management tools and its applicability

• Any other relevant information.

Moreover, the SIF will disclose its portfolio (along with ISIN), including derivative instruments, as on the last day of every alternate month (i.e. as on the end of May, July, September, November, January and March) for all its investment strategies on the respective AMC website and on the website of AMFI within 10 days from the close of such month in a user-friendly and downloadable spreadsheet format. All other provisions regarding portfolio disclosure applicable to Mutual Fund schemes, will also be applicable to the investment strategies under the SIF.

8) Risk Band

SIFs will evaluate and disclose the risk level for all their investment strategies on a monthly basis on their respective websites and on the website of AMFI within 10 days from the close of each month.

The potential risk associated with the investment strategies of the SIF will be depicted through a pictorial risk meter, termed as 'Risk-band'.

The Risk-band shall have the following five levels of risks for investment strategies of SIF:

Risk band level 1(Lowest risk)

Risk band level2

Risk band level 3

Risk band level 4

Risk band level 5 (Highest Risk)

Based on the scheme characteristics, SIF will assign risk level for schemes at the time of launch of New Fund Offer of the investment strategy. Any change in risk band will be communicated by way of Notice cum Addendum and by way of an e-mail or SMS to unitholders of that particular investment strategy.

To conclude

By launching a new asset class, SEBI is pushing for innovation in India's financial markets. The product allows fund houses to develop new strategies to cater to evolving investor needs. This innovation could further strengthen India's capital markets, making them more attractive to diverse investors.

Investors will have access to a broader range of investment products that can be tailored to their risk appetite and financial goals. This flexibility allows them to build more balanced and resilient portfolios, potentially enhancing their overall returns.

Additionally, the new asset class may include innovative investment strategies that could capitalize on emerging market trends, providing investors with opportunities to benefit from sectors that were traditionally less accessible.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.