Investing in a Specialised Investment Fund (SIF) is not the same as buying a mutual fund unit. It requires a clearer understanding of how various strategies work, what role they might play in one's portfolio, and the risks that come along.
Understanding Where SIFs Fit in Your Portfolio
The first question investors should ask is where SIF fits in their portfolio. It is not a one-size-fits-all kind of investment. Some strategies may complement the existing portfolio by improving risk-adjusted returns, while others may be used selectively to diversify and calibrate losses. The positioning should therefore be strategy-driven rather than category-driven.
Knowing SIFs, their strategies, the effects of various strategies, and the risks is of the utmost importance. SEBI has therefore kept the minimum investment criteria of ₹10 lakhs per PAN across all investment strategies to start the SIF journey.
Choosing the Right Strategy
Even before one can start this journey, we must set our expectations right. Performance of Funds can vary based on the positioning, strategy, level of risk, and prevailing market conditions.
Here are the strategies and their characteristics:
Equity Long-Short Fund
Minimum investment in equity and equity related instruments – 80% and Maximum short exposure through unhedged derivative positions in equity and equity related instruments: 25%.
Equity Ex-Top 100 Long-Short Fund
Minimum investment in equity and equity related instruments of stocks excluding top 100 stocks by market capitalization – 65%. Maximum short exposure through unhedged derivative positions in equity and equity related instruments of other than large cap stocks: 25%.
Sector Rotation Long-Short Fund
Minimum investment in equity and equity related instruments of maximum 4 sectors – 80% & Maximum short exposure through unhedged derivative positions in equity and equity related instruments: 25%. Short exposure shall apply at the sector level, covering all stocks within that sector held in the portfolio.
Debt Long-Short Fund
Investment in debt instruments across duration, including unhedged short exposure through exchange traded debt derivative instruments.
Sectoral Debt Long-Short Fund
Investment in debt instruments of at least two sectors, with maximum investment of 75% in a single sector. Maximum short exposure through unhedged derivative positions in debt instruments: 25%. Short exposure shall be across the sector, applicable for all the instruments of that particular sector held in the portfolio.
Active Asset Allocator Long-Short Fund
Dynamic investment across following asset classes: Equity, debt, equity and debt derivatives, REITs/InVITs and commodity derivatives. Maximum short exposure through unhedged derivative positions in equity and debt instruments: 25%.
Hybrid Long-Short Fund
Minimum investment in equity and equity related instruments – 25%. Minimum investment in debt instruments – 25%. Maximum short exposure through unhedged derivative positions in equity and debt instruments: 25%.
Strategies within the same category can be positioned differently. Two equity-oriented strategies, for example, may have very different risk levels, return expectations, and use of derivatives. They should, therefore, not be viewed through the same lens.
Thus, at a broader level, we can classify categories based on two distinct purposes:
- Potential Return maximisation, where a higher risk could be taken to generate higher returns
- Risk mitigation, where the focus is on delivering more stable, risk-adjusted outcomes
Understanding where a strategy lies on this spectrum is critical.
Major Aspects to Consider Before Investing
An investor must also check these few aspects:
Evaluating Fund Managers
Given the active nature of these strategies, the experience and approach of the fund manager might influence outcomes. Investors may review prior experience in handling similar strategies for better context.
Taxation
SIFs follow mutual fund taxation, with treatment depending on the underlying asset mix. For equity-oriented SIFs, long-term capital gains (above ₹1.25 lakh) are taxed at 12.5% (holding period of 12 months & more), while short-term gains are taxed at 20% (holding period of <12 months). For hybrid SIFs with less than 65% equity exposure and are interval funds, gains are taxed at slab rates, and a holding period of 12 months is required for them to be classified as long-term.
Liquidity
SIF liquidity can be relatively restricted than that of mutual funds. Many strategies could have notice periods or interval structures with varying redemption frequency or window.
Performance Review
SIFs need regular review, may not be considered as a one-time investment decision. Checking risk level, portfolio behaviour, and strategy execution is a must. SEBI's monthly disclosures make this convenient.
Performance in Different Market Conditions
SIF performance depends not just on market direction but also on volatility, which makes timing more relevant than in traditional mutual funds. Here are a few rules of thumb:
In strong bull markets, long-short strategies often lag because short positions reduce upside.
In volatile or sideways markets, long-short strategies usually perform well because they can earn from stock-level differences.
In falling markets, SIFs may soften the blow but are not meant to hedge all losses due to limits on short exposure.
Understanding how each strategy behaves across market conditions may help investors decide when to enter or increase allocation.
Conclusion
SIFs don't replace core investing principles. They expand your investing toolkit. But they also demand clarity, setting expectations, discipline, and measured allocation. When used thoughtfully, they might optimize a portfolio by adding flexibility and diversification. When used without sufficient understanding, they may introduce unnecessary complexity and risk.