SEBI Introduces Regulatory Framework for Specialized Investment Funds (SIFs)

The Securities and Exchange Board of India (“SEBI”) published a consultation paper on draft securities market regulation for Specialized Investment Funds (“SIFTs”), with an expected effective date of April 1, 2025. This framework seeks to fill gaps between mutual funds (MFs) and portfolio management services (PMS), which allows sophisticated investors more flexibility with their investments while still being held to regulations.

Eligibility Criteria for SIFs

A SEBI-registered mutual fund can set up a SIF by fulfilling certain conditions via either of the two) routes:

• Route 1: The USP of the mutual fund must be at least three years old in the market and an average AUM of ₹10,000 crore in the last three years. Besides, over the last three years, no action on the regulatory front should have been initiated against the sponsor or asset management company under the provisions of the SEBI Act.
• Route 2 (Alternate Route): AMC will have to appoint a Chief Investment Officer (CIO) with 10 years of prior experience managing ₹5,000 crores along with a fund manager having a minimum of three years of experience managing ₹ 500 crores. As in Route 1, no member of the sponsor or AMC should have taken regulatory action during the last 3 years.

Investment and Restrictions

• The minimum investment in SIFs is ₹10 lakh per investor, which has to be maintained on a PAN-wise basis across all investment strategies. This limit is applicable only for SIF investments and does not include normal MF schemes of the same AMC. This requirement does not apply to accredited investors.
• Systematic investment options such as Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP) and Systematic Transfer Plans (STP) are allowed as long as they meet the minimum investment threshold.
• Investment limits: Under SIF, an investment strategy can invest up to 20% of NAV in AAA-rated debt, 16% in AA-rated debt, and 12% in A-rated and lower. It should also not invest more than 25% of its NAV in the debt and money market securities of a specific sector.

SIFs will have multiple investment strategies in equity, debt and hybrid asset classes.

Equity-oriented investment strategies: Equity long-short fund; equity ex-top 100 long-short funds; sector rotation long-short fund.

• Equity Long-Short Fund: Minimum allocation to equity and equity-related instruments will be at least 80%, and maximum short exposure (un-hedged derivative positions) in equity and equity-related instruments will not be more than 25%.
• Equity Ex-Top 100 Long-Short Fund: Minimum investment in equity and equity-related instruments of stocks other than top 100 by market capitalisation will be 65%, and maximum short exposure through unhedged derivative positions in equity and equity-related instruments of other than large-cap stocks will be 25%.
• Sector Rotation Long-Short Fund — 80% minimum investment in equity and equity-related instruments of equal to or up to 4 sectors involved and 25% maximum short exposure through unhedged derivative positions in equity and equity-related instruments.

Debt-based investment strategies: Debt long-short fund and sectoral debt long-short fund.

Hybrid investment strategies: Hybrid long-short fund and hybrid long-short fund

To avoid over-proliferation of funds, SEBI has capped the number of AMCs to one investment strategy for each category- SUBSCRIPTION, REDEMPTION AND LISTING

SIFs can be an open-ended, close-ended, or interval fund strategies. SIF will not impose limits on investment strategy subscription and redemption intervals and will bestow strategic selection intervals based on investment nature. Note that an investment strategy's subscription frequency and redemption frequency are not each other's opposites. The notice period for redemptions can go up to 15 working days. Closed-ended and interval funds must be exchanged in stock exchanges.

Benchmarking

SIF will have single-tier benchmark structure for its investment strategies. Equity oriented investment strategies is compared to a broad representative market index (e.g. BSE Sensex or NSE Nifty or BSE 100 or CRISIL 500 etc.), and debt oriented investment strategies is compared with a broad representative index which is representative of the funds portfolio. In contrast, hybrid investment strategies are compared with the suitable broad representative benchmark wherever available.

Branding and Marketing

To distinguish SIFs from mutual funds, SEBI requires AMCs to have a separate branding for their SIF schemes. For a full five years, they can use the sponsor’s brand name, but it has to be in conjunction with phrases like “brought to you by” or “offered by” to keep things clear. Moreover, SIFs should have their own dedicated website or webpage so that no confusion is caused with the general mutual fund schemes, and AMCs will have to ensure that a SIF has its own brand name and logo, separate from that of its general mutual fund. The SIF’s brand name in promotional materials must be equal to or larger than the mutual fund brand name.

Risk Management

Risk has been classified into 5 levels (Risk Band 1 to 5) and reviewed on a monthly basis. SIFs may hold up to 25% of their net assets in exchange-traded derivative instruments for non-hedging purposes, with exposure calculations on the basis for mutual fund treatment. Cumulative gross exposures across both cash and derivative markets cannot exceed 100% of net assets.

Disclosure

SEBI made it mandatory for SIFs to provide regular disclosures on the portfolio, liquidity risk, and scenario analysis on their websites. And adverts about Sifs will have to include a standard risk warning.

Disclaimer: This news is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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