Specialized Investment Fund: The New Asset Class Introduced by SEBI

The Securities and Exchange Board of India (SEBI) has designed a new asset class, the Specialised Investment Fund (SIF), to bridge the gap between mutual funds and portfolio management services (PMS). The regulator had previously presented the idea of a new asset class in July 2024 in consultation papers. It will come into effect on April 1, 2025. The regulator believes that India’s financial market has grown over the years with various investment products, each varying in complexity and risk. SIFs are designed to bridge the gap by offering portfolio flexibility and maintaining regulatory compliance, ensuring the protection of investors.

Eligibility Criteria for Asset Management Company (AMC) to establish an SIF

SEBI has highlighted two ways through which an AMC can establish SIF. A registered AMC must meet one of the two eligibility rules. These are as follows:

• First, if the AMC has been operating for at least three years, it should have an average Assets Under Management (AUM) of Rs. 10,000 crore or more for the last three years.
•  The alternative route is that the AMC must appoint a Chief Investment Officer (CIO) who has at least 10 years of experience in managing AUM of Rs. 5000 crore and a fund manager with at least three years of experience in managing Rs.500 crore.

What Investment Strategies would be used under SIFs?

SIFs will provide various investment strategies across equity, debt, and hybrid asset classes. There will be three equity-oriented investment strategies:

1. Equity Long-Short Fund: This strategy needs to have a minimum equity exposure of 80% with a maximum short exposure of 25% through unhedged derivatives positions in equity and equity-related instruments.

2. Equity Ex-Top 100 Long-Short Fund: It requires a minimum equity exposure of 65% in stocks, which excludes the top 100 by market cap. This strategy allows for a maximum short exposure of 25% through unhedged derivative positions in equity and equity-related instruments, excluding large-cap stocks.

3. Sector Rotation Long-Short Fund: This strategy will invest a minimum of 80% in equity and equity-related instruments of a maximum of four sectors. Additionally, the maximum short exposure through unhedged derivative positions in equity and equity-related instruments will be 25%.

In the case of debt, it will have two investment strategies: the long-short fund and the sector long-short fund. Similarly, the hybrid segment will also have two investment strategies, which include hybrid long-short funds and hybrid long-short funds.

According to SEBI, AMCs are restricted to having one investment strategy per category to avoid excessive fund proliferation.

Sponsorship Guidelines

As per SEBI guidelines, AMCs must have a separate brand identity for their SIF offerings. They can use the sponsor’s brand name for the first five years, but it must be accompanied by phrases like “brought to you by” or “offered by” to avoid confusion. Apart from this, SIFs are required to have their own personal website or webpage to avoid confusion with regular mutual funds. Additionally, SIFs must have a distinct brand name and distinct logo.

Minimum Investment

The minimum investment required for SIFs is Rs.10 lakh per investor across all investment strategies, and in case the investor’s total investment falls below 10 lakh due to redemption, they must withdraw the remaining investment.

As per the circular, the Asset Management Company (AMC) might provide options for regular investment plans, such as systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP), but they must comply with the Rs.10 lakh minimum threshold

Investment Limit

An investment strategy under SIF shall not invest more than 20% of NAV in AAA-rated debt, 16% in AA-rated debt and 12% in A-rated and below. The circular mentions that a 5% extension is possible with trustee approval. Additionally, there is a sectoral exposure cap of 25 percent of Net Asset Value (NAV) for debt investments.

Benchmark

The investment strategies of SIF shall follow a single-tier benchmark structure. Equity strategies shall be compared using widely recognised market indices such as BSE Sensex, NSE Nifty or BSE 100. While debt investment strategies and appropriate bond indices for debt strategies.