Understanding SEBI’s SIF Investment Strategies

The Securities and Exchange Board of India (SEBI) has introduced a new category of mutual funds, called Specialised Investment Funds (SIFs), which took effect on April 1, 2025. These funds open the door for investors to access sophisticated strategies, such as long-short investing, which were previously only accessible via Alternative Investment Funds (AIFs). With a minimum investment of ₹10 lakhs, SIFs offer a regulated way to diversify beyond traditional investments.

Fund Houses Line Up to Launch SIFs

The launch of SIFs has created a buzz in the asset management world. Several prominent fund management companies have already received regulatory approval.

• ICICI Prudential Mutual Fund, Quant Mutual Fund, SBI Mutual Fund, and ITI Mutual Fund have secured approvals to introduce their SIF products.
• Other major players are also in the queue. The CEOs of Edelweiss Mutual Fund and Mirae Asset Investment Managers have confirmed that they are awaiting approval to launch a hybrid long-short fund and an equity long-short fund, respectively. Nippon India Mutual Fund is also awaiting the green light for its long-short fund.

As Jatinder Pal Singh, CEO of ITI Mutual Fund, put it, "We see a lot of potential in this category, similar to what we have seen in alternative investment funds that have been able to amass assets with these long-short strategies."

The Investment Strategies of SIFs

The strategies used by SIFs, especially those involving derivatives, are designed to be managed by professionals. This is particularly relevant given a recent SEBI study, which found that between FY22 and FY24, 93% of individual traders lost money in the equity Futures & Options (F&O) segment. The total losses for these traders surpassed a staggering ₹1.8 lakh crores over three years. In the 2024 financial year alone, about 73 lakh individual traders (91.1% of the total) incurred losses.

SIFs provide a framework where fund managers handle these complex instruments, aiming to generate returns while carefully managing risk.

What are the Investment Strategies in SIFs?

SIF strategies often involve taking both "long" positions (betting an asset's price will rise) and "short" positions (betting it will fall). A key concept here is "offsetting." There are two main approaches:

• Offsetting Positions: In some cases, two positions can cancel each other out, reducing the portfolio's overall risk exposure. This typically happens when the positions are designed to hedge one another. 

For example, if a fund holds a long position in a stock ("Equity Long") and simultaneously holds a short position in that same stock's futures contract ("Futures Short"), the risks are offset. The net exposure is therefore reduced.

• Non-Offsetting (Additive) Positions: In other scenarios, the exposure of two positions is added together. This occurs when the positions do not hedge each other and are instead designed to increase exposure to a particular view. 

For example, if a fund holds a long position in a stock ("Equity Long") and also holds a long position in its futures contract ("Futures Long"), both positions are betting on a price increase. Therefore, the total exposure is the sum of both positions.

Here are the specific investment strategies permitted under the SIF framework, starting with the equity-focused ones:

Equity Oriented Investment Strategies

1. Equity Long-Short Fund

• What It Is: The fund manager buys stocks they believe will rise in value (goes long) and sells stocks they expect to fall (goes short).
• How It Works: The goal is to profit from both winning and losing stocks, potentially delivering returns even when the overall market is flat or declining.
• The Rule: The fund must invest a minimum of 80% of its assets in stocks and stock-related instruments.

2. Equity Ex-Top 100 Long-Short Fund

• What It Is: The fund applies the long-short approach to the universe of mid-cap and small-cap stocks.
• How It Works: The fund manager specifically looks for winners and losers among companies that are not in the top 100 by market size.
• The Rule: A minimum of 65% of the fund's assets must be invested in stocks outside the top 100.

3. Sector Rotation Long-Short Fund

• What It Is: A high-conviction strategy that makes concentrated bets on entire industries.
• How It Works: The fund manager invests in a maximum of four sectors, going long on those poised for growth and short on those expected to decline.
• The Rule: If the manager shorts a sector, they must short all stocks held within that sector. The fund must also maintain a minimum investment of 80% in equities.

A Key Rule for All Equity Strategies: The maximum short exposure through unhedged derivative positions is limited to 25% of the fund's net assets. A corresponding long position doesn't balance an "unhedged" short position, so this cap helps control the fund's overall risk.

Debt Oriented Investment Strategies

SEBI has also extended long-short strategies to the debt market, allowing fund managers to take positions on interest rate movements, credit quality, and other factors that affect bonds and other debt instruments. The two permitted strategies are:

1. Debt Long-Short Fund

• What It Is: A fund that invests in a wide variety of debt instruments, such as government and corporate bonds with different maturities (durations).
• How It Works: The fund manager can go long on debt instruments they expect to perform well and use exchange-traded debt derivatives to take short positions, betting against certain bonds or on interest rate movements.

2. Sectoral Long-Short Fund

• What It Is: This strategy focuses on the debt issued by companies in specific sectors of the economy.
• How It Works: The fund invests in the debt of at least two different sectors, with no single sector making up more than 75% of the portfolio. This allows for targeted bets on the creditworthiness of specific industries.
• The Rule: If the manager decides to short a sector (e.g., the Auto sector), they must short all debt instruments from that sector held in the portfolio.

These funds will apply similar long-short principles but within the universe of debt securities, aiming to generate returns from changing conditions in the fixed-income market.

Hybrid Investment Strategies

Hybrid strategies offer a blend of asset classes, giving fund managers the flexibility to navigate different market environments by investing in both equity and debt.

1. Active Asset Allocator Long-Short Fund

• What It Is: A highly flexible, dynamic fund that can invest across a wide range of asset classes.
• How It Works: The fund manager can shift investments between equity, debt, derivatives, REITs/InvITs, and even commodity derivatives. This allows them to actively manage the portfolio based on their market outlook, including taking limited short positions.
• Structure: This particular strategy follows an interval structure, meaning investments and redemptions happen at specific, pre-defined times.

2. Hybrid Long-Short Fund

• What It Is: A more structured hybrid fund that maintains a balanced exposure to both equity and debt.
• How It Works: This fund provides a mix of growth from equities and stability from debt. It applies long-short strategies within this balanced framework.
• The Rule: The fund must maintain a minimum investment of 25% in equity and a minimum investment of 25% in debt instruments, ensuring it doesn't stray too far from its hybrid mandate.

A Critical Rule for All Hybrid Strategies: For both of the hybrid funds above, the maximum short exposure through unhedged derivative positions in equity and debt is capped at 25% of the fund's assets.

In addition to these equity strategies, SEBI has also permitted Debt Oriented and Hybrid Investment Strategies, giving fund managers a broad toolkit to navigate different market conditions.

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