Mutual funds are widely known investment products that collect money from multiple investors and invest in securities like stocks and bonds. However, in India, mutual funds cannot take short positions, meaning they can only profit when stock prices go up, not when they fall. This limitation led SEBI to create SIFs, which offer more flexibility by allowing some level of short-selling and hedging strategies.
SIFs operate through three broad investment strategies:
– The first is equity-oriented strategies, where funds invest primarily in stocks while having a limited ability to take short positions. For instance, an Equity Long-Short Fund must invest at least 80% of its portfolio in stocks while being allowed to take short positions up to 25%.
– The second category is debt-oriented strategies, which focus on fixed-income securities like bonds. Debt Long-Short Funds allow investments across different types of bonds, while Sectoral Debt Funds concentrate on specific sectors but limit exposure to 75% per sector. These funds provide investors with an alternative to traditional debt mutual funds, offering better risk management options.
– The third type is hybrid strategies, which combine multiple asset classes. The Active Asset Allocator Fund dynamically invests across equity, debt, commodities, and real estate investment trusts (REITs). Another variant, the Hybrid Long-Short Fund, ensures that at least 25% of its investments are allocated to both equity and debt, creating a balanced approach for investors seeking diversification.
One key feature of SIFs is the minimum investment requirement. Investors need to put in at least ₹10 lakh to participate, ensuring that only serious and well-informed investors enter this space. If an investor’s total investment falls below ₹10 lakh due to redemptions, they must withdraw their entire remaining amount. Unlike PMS, SIFs allow systematic investment plans (SIPs) and systematic transfer plans (STPs), making them more accessible for investors who prefer phased investments.
SIFs can only be launched by mutual fund companies, but there are strict eligibility criteria. If an Asset Management Company (AMC) has been operating for at least 3 years, it must have an average Assets Under Management (AUM) of ₹10,000 crore over the past 3 years. Alternatively, an AMC can qualify by appointing a Chief Investment Officer (CIO) with at least 10 years of experience managing assets worth ₹5,000 crore or more. These regulations ensure that only well-established financial institutions handle SIFs, adding a layer of security for investors.
One important aspect of investing in SIFs is the redemption process. Unlike traditional mutual funds, where investors can withdraw money on any business day, SIFs may require a notice period of up to 15 working days. This rule helps fund managers manage liquidity efficiently while protecting existing investors from sudden large withdrawals.