In today’s Finshots, we talk about SEBI’s newly introduced Specialized Investment Funds (SIFs).

The Story

Let’s say you’ve saved up ₹10 lakhs and want to invest it wisely. Mutual funds seem too simple. Portfolio Management Services (PMS) need ₹50 lakhs to get started. And Alternate Investment Funds (AIFs), which often invest in assets like derivatives, feel too risky.

So, circling around this indecision, you end up keeping your cash in the bank, and it doesn’t give you the return you’d hoped for.

Enter Specialized Investment Funds (SIF)s, a new investment option from SEBI, offering advanced strategies for folks who want more than mutual funds but don’t have the hefty amounts PMS require.

Simply put, SIFs are more like a product class than an asset class. With a ₹10 lakh minimum investment, they give you access to advanced strategies without needing ultra-high-net-worth status.

Here’s how they’ll work.

Imagine a mutual fund launching a focused strategy — like profiting from the renewable energy boom. A fund manager crafts the plan, and once ready, it’s offered to investors willing to put in ₹10 lakhs or more. The pooled money is then managed to aim for better returns with a more focused and risk-managed approach.

This brings us to two questions – why the ₹10 lakhs figure and what’s different in this apart from what mutual funds already do?

Well, before SIFs, if you wanted to invest those ₹10 lakhs, you barely had any luck. One option was to put it in mutual funds through a lump sum investment or a  systematic investment plan (SIP). But you were mostly left at the mercy of normal investing where funds would just be invested based on stock classifications. There wasn't a strategy as such. And while that meant less risk, it also meant lesser returns.

Say your friend – who had access to bigger capital about ₹50 lakhs – would happily give it to a professional handling PMS and they would be earning higher returns just because the PMS would invest in high-risk, high-reward assets.

So, SIFs offer the option to deploy higher capital, with expert strategies and various asset classes.

And unlike PMS, SIFs can only be launched by mutual funds, not independent advisors or firms. This setup helps keep costs low because expenses are shared among all investors in the fund. This is unlike PMS where each investor is charged separately based on their profits and capital as well as the assets the investment advisor has invested in. And it also makes it easier to regulate, bring in transparency, and keep an eye on in terms of how the fund is collectively doing.

And the appeal doesn’t end there. SEBI’s strict diversification rules ensure that your money is spread across different assets to manage risks. Because SIFs can invest not only in stocks but also in debt securities, REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts).

And since these assets could be riskier than stocks at times, SEBI has some guidelines about how funds can go about investing in them. For instance, if your fund is investing in debt securities, it should not expose the investment to over 20% of the funds overall capital. For equities, investments in a single company’s stock are capped at 10% of total assets. And exposure to REITs and InvITs is limited to 20% of the portfolio, with no more than 10% allocated to any single issuer of these instruments.

In simpler terms, SEBI wants to ensure that your money isn’t overly exposed to one sector or company, and therefore it’s spreading risk for a more balanced approach.

Then comes the flexibility bit. The guidelines allow SIFs to be structured as open-ended, closed-ended or interval-based funds. What’s that you ask?

Well, open-ended funds permit continuous inflows and redemptions, providing liquidity. Closed-ended funds lock in investments for a specified duration, enabling fund managers to execute long-term strategies. While interval funds offer a mix, with liquidity windows at predefined intervals. These structures ensure that fund managers can align their operations with the fund’s strategic objectives.

And lastly, we have the expense ratio. When it comes to costs, SIFs use a transparent expense ratio system, similar to mutual funds. The fees could start at 2.25% annually for funds with assets under ₹500 crores and decrease as the fund size grows. For larger funds, this means cost-efficiency, similar to volume discounts in retail shopping.

This setup is much fairer compared to PMS, where costs are tied to individual profits and portfolios rather than a fixed expense ratio as above.

But why do SIFs even matter, you ask?

Well, they represent a maturing market. Globally, similar products offer advanced strategies without needing to dive into hedge funds. SEBI’s move to introduce SIFs brings India closer to global standards, making these tools more accessible.

They also bring up an asset class for those who were dabbling in derivatives for higher returns but didn’t fully understand it. While SIFs are not yet investing in derivatives, they do offer the option for higher returns for the ones who want it with advanced investment strategies and that’s a step forward.

In fact, if everything goes smoothly, maybe SEBI could even allow SIFs to invest in derivatives. And this would be a gamechanger of sorts. Because you see, today while PMS or Alternative Investment Funds (AIFs) invest big sums of investor money in derivative instruments, investors are unaware about where their money is invested, unless they specifically ask. And that’s a concern. SIFs bring this transparency, because like mutual funds, they are required to disclose where your money is being invested periodically.

But SIFs aren’t perfect.

They rely heavily on skilled fund managers, meaning a wrong move could lead to significant losses. Add to that the high operational costs of advanced strategies, which can chip away at returns, especially in volatile markets. And while the ₹10-lakh minimum is lower than PMS requirements, it’s still out of reach for most retail investors.

But despite these hurdles, SIFs hold immense potential. They could bridge the gap between traditional asset management firms and fintech platforms, offering personalised strategies at the click of a button. SEBI might even introduce similar options tailored for smaller investors in the future.

For the sustainability-focused, SIFs could prioritize ESG (Environmental, Social and Governance) investments, aligning portfolios with global goals. Thematic SIFs centered on sectors like green energy or infrastructure could not only grow your portfolio but also drive critical funding into nation-building efforts.

In short, SIFs are more than just another investment product. They’re a fresh take on wealth creation. But, as always, it boils down to weighing the risks and benefits. Sure, looking at how similar funds have performed globally can offer clues, though past performance is no guarantee.

What really matters is understanding the potential rewards and deciding if SIFs align with your investment strategy.

Until next time…

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