Last month, I had a conversation with a seasoned wealth creator—someone who’s built a successful business, sold equity at the right time, and now manages a diversified portfolio across real estate, private equity, and traditional mutual funds.
He wanted to know more about Specialised Investment Funds. He was hearing about SIFs in his social circles but he wanted to understand what makes them different from regular mutual funds— and whether his portfolio really needed them?
It’s a fair question. And he’s not alone.
Over the past few months, as SEBI introduced the framework for Specialised Investment Funds (SIFs), I’ve noticed a pattern: excitement from product teams, confusion among distributors, and caution from sophisticated investors trying to separate genuine innovation from repackaged complexity.
So in this edition of the Create Wealth newsletter, I want to cut through the noise and offer what I believe wealth creators actually need: a first-principles understanding of SIFs—what they are, who they’re for, who they’re not for, and most importantly, the questions you should be asking before investing.
In this edition, we’ll cover:
- What are Specialised Investment Funds?
- The three categories of SIFs decoded
- Who should consider SIFs (and who shouldn’t)
- The Dezerv perspective: Why this innovation needs careful handling
- Questions to ask before investing in an SIF
Let’s dive in.
What are Specialised Investment Funds?
Think of SIFs as SEBI’s attempt to bring sophisticated investment strategies—the kind typically found in hedge funds —into the regulated, tax-efficient structure of mutual funds.
Here’s the simplest way to understand them:
Traditional Mutual Funds: Long-only strategies. Your fund manager buys stocks or bonds they believe will go up. If the market falls, your portfolio typically falls with it.
Specialised Investment Funds (SIFs): Long-short strategies. Your fund manager has flexibility to buy stocks they believe will rise (long positions) and sell stocks they believe will fall (short positions). This creates the potential to generate returns even in declining markets—or at least cushion the downside.
SIFs give fund managers more tools to express their investment views, manage risk actively, and potentially deliver returns that are less dependent on market direction.
Here’s a quick comparison between mutual funds and SIFs –
Why did SEBI introduce SIFs?
India’s mutual fund industry has grown remarkably— ~₹76 lakh crore in AUM, over 6 crore unique investors, and a deepening culture of equity investing. But until recently, the options were relatively standardised: large-cap funds, mid-cap funds, flexi-cap funds, debt funds, and so on.
Sophisticated investors often looked beyond mutual funds towards offshore hedge funds for strategies that could actively manage downside risk or target absolute returns regardless of market conditions.
SIFs bridge that gap. They offer:
- Strategy diversity: Long-short, sector rotation, hybrid allocation—approaches previously unavailable in mutual funds
- Tax efficiency: Structured as mutual funds, SIFs benefit from more favourable tax treatment compared to Alternative Investment Funds (AIFs)
- Regulatory oversight: SIFs operate under SEBI’s mutual fund framework, offering greater transparency and investor protection
- Lower entry barriers: While not designed for retail investors, SIFs are more accessible than traditional hedge fund equivalents
The intent is clear: give investors access to institutional-grade strategies without forcing them into complex, higher-cost structures.
The three categories of SIFs
Types of Specialised Investment Funds (SIFs)
A. Equity
1. Equity Long-Short Fund
- Equity Allocation: Minimum 80% in equities and equity related instruments
- Short Exposure: Up to 25% through unhedged equity derivatives
2. Equity Ex Top 100 Long Short Fund
- Equity Allocation: Minimum 65% in stocks outside the top 100 by market capitalization
- Short Exposure: Up to 25% in mid and small cap equities through unhedged derivatives
3. Sector Rotation Long-Short Fund
- Equity Allocation: Minimum 80% in a maximum of four sectors
- Short Exposure: Up to 25% at the sector level within the sector held in the Portfolio, through equity derivatives
B. Debt
1. Debt Long-Short Fund
- Core Allocation: Across debt instruments of various durations,
- Short Exposure: Permitted via exchange traded debt derivatives
2. Sectoral Debt Long-Short Fund
- Allocation: Debt instruments across at least two sectors (not more than 75% in one sector)
- Short Exposure: Up to 25% through unhedged derivative positions within a specific sector held in the Portfolio.
C. Hybrid
1. Active Asset Allocator Long-Short Fund
- Assets Covered: Equity, debt, equity & debt derivatives, REITs/InvITs, commodity derivatives
- Short Exposure: Maximum 25% in equity and debt instruments via derivatives
2. Hybrid Long-Short Fund
- Minimum Equity Allocation: 25%
- Minimum Debt Allocation: 25%
- Short Exposure: Up to 25% via unhedged derivative positions across both asset types
SEBI has structured SIFs into three broad categories, each targeting different investment objectives and risk profiles.
1. Equity SIFs
These funds focus primarily on equity markets but they can take short positions to manage risk or amplify alpha.
Sub-categories:
a) Equity Long-Short SIF
- What it does: Invests at least 80% in equity and equity-related instruments (stocks, index futures, options). Can take short exposure up to 25% through unhedged equity derivatives.
- Strategy positioning: Capture both upward and downward price movements using long and short equity positions. This flexibility allows fund managers to run anything from a fully long equity strategy to a market neutral strategy with minimal market exposure.
b) Equity ex-Top 100 Long-Short SIF
- What it does:
Equity exposure: Minimum 65% in stocks outside the top 100 by market capitalisation
Short exposure: Up to 25% in mid and small cap equities through derivatives
- Strategy positioning: Targets “beyond large-cap” alpha, typically with higher risk/reward profiles.
c) Equity Sector Rotation Long-Short SIF
- What it does: Concentrates investments in up to four sectors, with mandatory sector-level shorting.
Equity allocation: Minimum 80% in a maximum of four sectors
Short exposure: Up to 25% at the sector level, through equity derivatives
- Strategy positioning: If the fund shorts the automobile sector, it must short all automobile stocks in its portfolio at the sector level—creating stronger conviction-based bets.
- Who it’s for: Investors who believe skilled managers can identify sector trends and exploit relative performance differences between sectors.
2. Fixed Income SIFs
These strategies provide exposure to fixed income instruments while permitting controlled short positions in debt markets.
1. Debt Long-Short SIF
- Core allocation: Across debt instruments of various durations
- Short exposure: Permitted via exchange traded debt derivatives
- Strategy positioning: Interest rate and duration based positioning in debt markets
2. Sectoral Debt Long-Short SIF
- Allocation: Debt instruments across at least two sectors (not more than 75% in one sector)
- Short exposure: Up to 25% through unhedged derivative positions within a specific sector held in the portfolio
- Strategy positioning: Generate returns through relative value between sectors in the debt market
Who’s it for: These investment strategies are ideal for sophisticated conservative investors requiring diversified fixed income exposure combined with tactical long-short debt market strategies to optimize returns and manage interest rate risks.
3. Hybrid SIFs
These funds blend equity and debt, offering flexibility in asset allocation and shorting across both asset classes.
Sub-categories:
a) Hybrid Long-Short SIF
- What it does: At least 25% each in equity and debt, with up to 25% short exposure across both.
- Strategy positioning: Offers a flexible framework enabling fund managers to adjust allocations dynamically—from fixed asset mixes to positioning as fixed income alternatives.
- Who it’s for: Investors seeking balanced exposure with active downside management across both equity and debt markets.
b) Active Asset Allocator Long-Short SIF
- What it does: Invests across multiple asset classes—equity, debt, REITs/InvITs, and commodities.
- Strategy positioning: Caters to investors seeking diversified alpha generation and risk mitigation in a single product.
- Who it’s for: Those who want one-stop exposure to multiple asset classes with active risk management, similar to a multi-asset allocation fund but with long-short capabilities.
Who should consider SIFs?
SIFs aren’t for everyone. And that’s by design. Depending on the strategy positioning, one needs to evaluate the underlying risk and check for suitability
Here’s who they might suit:
1. Investors comfortable with complexity
Long-short strategies aren’t linear. Returns can diverge significantly from traditional benchmarks. If you’re comfortable evaluating strategies based on absolute returns, risk-adjusted metrics, and correlation to other holdings—rather than just comparing to Nifty or Sensex—SIFs could fit.
2. Those seeking tax-efficient alternatives to Alternative Investment Funds (AIFs)
If you’ve been investing in Category III AIFs for hedge fund-like strategies, SIFs offer similar approaches with potentially better tax treatment as mutual funds.
3. Those with exposure to concentrated portfolios
If you hold significant single-stock positions (ESOP concentration, founder equity, inherited holdings), SIFs can provide portfolio-level diversification with strategies designed to perform differently in various market conditions.
Who should not invest in SIFs?
Just as important as knowing who should consider SIFs is understanding who shouldn’t.
1. First-time mutual fund investors
If you’re still building familiarity with equity markets, asset allocation, and basic investment principles, SIFs add unnecessary complexity. Start with traditional equity and debt funds.
2. Investors seeking simple, buy-and-hold strategies
If your investment philosophy is “buy good companies and hold for the long term,” traditional mutual funds already serve you well. SIFs require active management and often involve higher turnover—adding cost and complexity without necessarily adding value for this approach.
3. Those uncomfortable with short-term volatility
Long-short strategies can experience periods where they lag traditional long-only funds, especially in strong bull markets. If you’re likely to panic during these phases, SIFs aren’t for you.
4. Investors without adequate corpus
SIFs should represent a tactical allocation within a broader portfolio—not your core holding. If you don’t have sufficient capital to diversify across traditional investments first, SIFs aren’t appropriate.
How are SIFs taxed?
SIFs are taxed like equity mutual funds –
With recent changes in tax rates, there is no indexation benefit now which affects the overall tax liability, potentially increasing it for long-term investors.
Equity-oriented SIFs have a ₹1.25 lakh annual exemption for long-term gains, while debt-oriented SIFs are taxed at the investor’s income tax slab rate.
My perspective: Promise and caution
India’s mutual fund industry has long needed product diversity beyond long-only strategies. For sophisticated investors, SIFs offer legitimate tools to manage risk and pursue returns in ways previously unavailable.
That said, I have concerns about how this product will be deployed in practice.
1. Wealth Managers need to learn first
Here’s what we should focus on as an industry: the risk of misselling.
Wealth managers—relationship managers, distributors, advisors—will be the primary channel through which SIFs reach investors. But first, they need to completely understand these strategies.
If the industry rushes to sell SIFs without first educating distributors and advisors, we’ll see a repeat of past mistakes—products sold on hype rather than suitability, leading to disappointed investors and damaged trust.
2. Suitability over sales
At Dezerv, we’ve always believed in suitability over sales. That principle matters even more with SIFs.
Before recommending an SIF, we need to answer:
- Does this strategy align with the client’s risk profile?
- Does the client understand how this strategy works and when it might underperform?
- Does the client have sufficient diversification across traditional strategies before adding this complexity?
- Is the fund manager demonstrably skilled in long-short investing, not just experienced in long-only strategies?
If the answer to any of these questions is uncertain, we shouldn’t be recommending the product—regardless of how innovative it sounds.
3. The industry needs to evolve
For SIFs to succeed, the entire ecosystem needs to level up:
- Fund managers need to develop and demonstrate genuine long-short expertise
- Wealth managers need rigorous training on strategy mechanics, risk management, and suitability assessment
- Investors need clear, transparent communication about what these strategies can and cannot do
- Regulators need to monitor for misselling and ensure distributors aren’t incentivised to push SIFs to unsuitable clients
Questions to ask before investing in an SIF
If you’re considering an SIF, here are the questions you need to ask:
1. About the strategy
- What specific investment approach does this SIF follow?
- How does the fund manager decide what to short and when?
- What’s the expected correlation to traditional equity indices?
- What market conditions favour this strategy, and which ones don’t?
2. About the Fund Manager
- Does the manager have demonstrable experience in long-short investing?
- What’s their track record in managing downside risk?
- How do they size positions and manage risk at the portfolio level?
- What happens if short positions move against them—do they have stop-losses or risk limits?
3. About suitability
- What percentage of my portfolio should this represent?
- Do I have adequate exposure to traditional strategies first?
- Am I comfortable with periods where this strategy might lag simple long-only funds?
- Do I understand that short positions can amplify losses if the fund manager is wrong?
4. About costs and structure
- What’s the total expense ratio compared to traditional mutual funds?
- Are there additional costs related to shorting (borrowing costs, margin requirements)?
- What’s the tax treatment of gains and losses?
- What’s the fund’s liquidity structure—can I exit easily if needed?
If your advisor can’t answer these questions clearly, or if the answers don’t make sense to you, that’s a signal to pause.
The right approach to SIFs
Here’s how I think about SIFs in the context of portfolio construction:
Core-satellite framework:
- Core holdings (70-80%): Traditional mutual funds, diversified across market caps, styles, and asset classes. This is where long-term wealth creation happens.
- Satellite holdings (20-30%): Tactical allocations, including potentially SIFs, used to manage specific risks, exploit specific opportunities, or diversify return sources.
SIFs belong in the satellite bucket—if they belong in your portfolio at all.
They’re not a replacement for traditional equity funds. They’re a complement, offering return profiles that behave differently in various market conditions.
In summary
Specialised Investment Funds represent a genuine innovation in India’s mutual fund landscape. They bring sophisticated strategies—previously accessible only through AIFs or offshore structures—into a regulated, tax-efficient mutual fund framework.
For the right investor—experienced, well-diversified, comfortable with complexity—SIFs offer legitimate tools to enhance returns and manage risk.
At Dezerv, we’re watching this space closely. We’re excited about the possibilities.
Because at the end of the day, wealth creation isn’t about chasing the latest innovation. It’s about building portfolios that align with your goals, match your temperament, and stand the test of time.
SIFs can be part of that equation. But only if deployed thoughtfully, understood fully, and sized appropriately.
Disclaimer – Our licenses: Dezerv Investments Private Limited is a Portfolio Manager with SEBI Registration no. INP000007377.
Disclosure:Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Mutual Fund distribution services are offered through Dezerv Distribution Services Private Limited, a wholly owned subsidiary of Dezerv Investments Private Limited (collectively referred to as “Dezerv”) with AMFI Registration No.: ARN- 248439 and APMI Registration No.: APRN-00615.
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