SPECIALIZED INVESTMENT FUND : A NEW ASSET CLASS

The Securities and Exchange Board of India (SEBI) has launched a new investment opportunity that bridges the gap between mutual funds and portfolio management services (PMS). Termed 'Specialised Investment Funds' (SIF), these offerings require a minimum investment of Rs 10 lakh, allowing investors to access advanced and sophisticated investment strategies.

SIFs cater to investors who possess a deeper understanding of the markets and are open to taking on greater risks in pursuit of potentially higher returns. They provide greater flexibility for ambitious investors.

These investment strategies could include exposure to equity, debt, real estate investment trusts (REITs) etc. This would mean that depending on the individual strategy chosen by the asset management company (AMC), an SIF could offer a higher risk, higher return profile compared to a regular equity fund.

The demand for a product similar to SIF has been growing, as investors are looking for options that offers something more advanced than traditional mutual funds yet remain more affordable than Portfolio Management Services (PMS), which typically require a minimum investment of Rs 50 lakh and offer complex strategies.

Over time, PMSs have evolved to become complex products, especially for the AMC, as they manage each investor portfolio individually.

To safeguard investor interest, SEBI has imposed certain limitations on the SIF, such as a maximum of 10% investment in any one listed company at the fund level and 20% for any issuer of debt security. Moreover, government securities (G-Secs) and treasury bills (T-bills) are exempt from the restrictions.

Also Fund managers managing the SIF will need to be certified by the National Institute of Securities Market (NISM). The structure of the SIF will allow the fund manager to pursue not only strategies seeking excess returns through bolder investment bets or exotic derivative strategies but also optimising the risk-return profile by seeking exposure to a more diversified asset exposure depending on the market environment.

Since SIFs will follow a mutual fund structure, their fee structure will operate within the framework defined for mutual funds. The fees and expenses for the investment strategies under SIF will be per Regulation 52 of the mutual fund regulations.

GUIDELINES FOR VARIOUS INSTRUMENTS

DEBT INSTRUMENTS: Exposure to any single issuer is limited to 20% of the total assets, although this limit may be increased to 25% with the approval of the trustees and board of directors. This measure is designed to limit risk and ensure the fund maintains diversification without excessive exposure to any single entity. Additionally, the 20% restriction does not apply when the strategy focuses on investments in government securities and treasury bills.

EQUITY: SIFs are permitted to invest up to 15% of a company's paid-up capital, provided they have voting rights. Furthermore, they can invest no more than 10% of their Net Asset Value (NAV) in the equity shares of any company. The 15% limit offers an advantage to SIFs compared to traditional mutual funds, which have a cap of 10%.

REITs and InvITs: SIFs may allocate up to 20% of their assets to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), but no more than 10% can be invested in any single issuer. This structure allows for diversification while still providing targeted exposure to the real estate and infrastructure sectors.

HOW DOES SIF DIFFER FROM MFS?

With a minimum investment ceiling of Rs 10 lakh, SIFs allow asset managers to allocate up to 15 percent in a single security — significantly higher than the 10 percent limit under traditional MF schemes.

SIF, which was first proposed by Sebi in July 2024, aims to fill the gap between MFs and portfolio management services (PMS), and it looks at informed investors, who are willing to take riskier bets.

SIFs, while having higher flexibility than MFs, will be subject to investment restrictions. If you have saved up to ₹10 lakhs and want to invest wisely, you might find mutual funds too simple and Portfolio Management Services (PMS) require a minimum of ₹50 lakhs. Alternate Investment Funds (AIFs) can be risky, leaving you hesitant and keeping your cash in the bank, yielding low returns.

Enter Specialized Investment Funds (SIFs), a new option. With a minimum investment of ₹10 lakhs, SIFs offer advanced investment strategies for those seeking more than mutual funds without the hefty PMS requirements.

WHY THE ₹10 LAKH FIGURE ?

Previously, before the introduction of SIFs, if you wanted to invest ₹10 lakhs, your options were quite limited. You could either invest in mutual funds via a lump sum or a systematic investment plan (SIP). However, this left you primarily reliant on conventional investing methods, where funds were allocated based on stock classifications without a specific strategy. While this approach reduced risk, it also resulted in diminished returns.

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.

FLEXIBILITY

For those who might be wondering what these are:

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.

TRANSPARENCY

Lastly, the expense ratio for SIFs is transparent, akin to mutual funds. Fees start at 2.25% annually for funds under ₹500 crores and decrease with larger fund sizes, offering cost-efficiency similar to volume discounts. Like mutual funds they are transparent, they are required to disclose where your money is being invested periodically.

CONCLUSION

In summary, SIFs represent more than just another investment option; they offer a new perspective on building wealth. However, it is essential to carefully evaluate the associated risks and benefits. While examining the performance of similar funds can provide insights, remember that past results do not guarantee future success. Ultimately, what is crucial is grasping the potential advantages and determining whether SIFs fit your overall investment strategy.