Specialised Investment Funds can offer retail MF investors access to PMS-type investing but should you rush in?

Time of India

6 hours ago

With the nod of the Securities and Exchange Board of India (
Sebi
) earlier this year, a new investment vehicle—specialised investment fund (SIF)—is set to enter the market. Positioned as a middle ground between
mutual funds
and
portfolio management services
(PMS), SIFs offer greater risk-taking potential and more sophisticated strategies within a regulated framework, targeting so-called 'seasoned' investors who can commit Rs.10 lakh to start with.
Many think only large investors have access to complex, often secret, and exotic investment strategies. However, with SIFs allowed to pursue differentiated strategies rather than regular mutual funds, retail mutual fund investors are showing strong interest — more so as a lot of them always wanted to try PMS but could not meet its high investment threshold of Rs.50 lakh. Several
asset management companies
(AMCs) are gearing up to enter this market. Some have already created new SIF-specific entities, as required by Sebi. However, we are yet to see the launch of individual strategies. To be sure, the SIF will have strategies, just like a mutual fund has schemes. The regulator also mandates this difference in nomenclature to help investors avoid confusion.
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Can SIF make PMS obsolete?
It's too early to say. As a concept, SIF will compete with PMS — not just by virtue of its lower investment threshold but because it offers the same investor-friendly taxation as mutual funds, compared to the more complicated tax liabilities associated with PMS. Hence, the arrival of SIFs is a welcome development, despite some expected opposition to new financial products, as controlled financial innovation is vital for the evolving Indian market as a whole.
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Short Explainer on Long-short Strategies:
These aim to generate positive returns regardless of market direction by holding both long (buy) & short (sell) positions, either to hedge against losses, create a market-neutral portfolio, or adjust positions based on expected market movements. Fund managers may use these strategies to capitalise on relative performance between stocks or sectors, such as going long on undervalued stocks & shorting overvalued ones. However, these strategies require skillful decision-making, involve more active calls, & are harder to benchmark.
For someone with Rs.10 lakh to invest, SIFs may seem exciting, like a ticket to an exclusive club earlier reserved only to big investors. But is rushing into this 'Mini-PMS' a smart move? For the sake of discussion, let's limit ourselves to only three equity-oriented strategies allowed for SIFs (others being two in debt, and another two in the hybrid space; refer to the table). One needs to think critically about what purpose SIF will serve in one's portfolio, which already includes equity mutual funds.
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Concentration can work both ways
Even though equity SIFs will operate like equity funds and are allowed to have more concentrated portfolios, they have one distinct feature that permits greater risk-taking. Unlike mutual funds, SIFs can engage in derivatives (futures/options) without holding the underlying assets. This allows SIFs to take unhedged short positions, i.e. betting on price declines, up to 25% of the fund's value. While this capability provides more flexibility, it also introduces higher risks, as concentrated investments can amplify both profits and losses, and complex short-selling strategies demand precise market foresight by the fund manager. This flexibility does not guarantee that SIFs will deliver better results than mutual funds.
Many investors may feel they have outgrown the simplicity of mutual funds, having stuck to them for years, and seek the sophisticated complexities usually available to larger portfolio holders. Combined with the financial or emotional restraints of
investing
a larger sum, the SIF may seem an appealing solution.
No track record, yet
However, SIFs are relatively new and lack a proven track record. Once launched, it would be essential to examine how fund managers approach them, as each may use unique investment strategies and portfolio management styles. For example, some might focus on aggressive short-selling or concentrated debt positions, while others may prioritise a market-neutral strategy, leading to varied risk and return profiles. Before committing to SIFs, investors must take time to understand these differences and assess how each fund's management aligns with their goals.
It is better to wait and watch. Investing in something untested, no doubt, is glamorous, but it could also unnecessarily increase risks. So, consider SIFs later once they have established some credibility as a concept and have demonstrated desirable investment outcomes.
This may sound boring, but the fact is that your existing, basic equity funds remain a super-product for most of your investment needs! If you still want to test the waters and have `10 lakh to spare, ensure you have the stomach for the risk that comes with SIFs. Just remember: in regulated markets, there's no magic formula or surefire way to get rich quick.
The Author is FOUNDER, STABLEINVESTOR