India's market regulator, the Securities and Exchange Board of India (SEBI), has unveiled a new asset class called specialised investment funds (SIFs), aimed at providing small investors with high-risk investment opportunities. The products will be offered by mutual funds. The new regulatory framework sets a minimum investment threshold of Rs10 lakh for most investors, with an exemption for accredited investors. SIFs can be structured as open-ended, close-ended, or interval funds, providing investors with greater portfolio diversification and tailored investment approaches.
The introduction of SIF aims to bridge the supposed gaps between existing investment vehicles, portfolio management services (PMS) and mutual funds (MF) which have long dominated the investment landscape, each with distinct characteristics. PMS represent the most personalised but expensive investment option. With a hefty minimum investment requirement of Rs50 lakh, PMS caters to high-net-worth individuals. The primary advantage of PMS lies in its granular control - each investor's portfolio remains individually managed, providing customisation. During market volatilities, PMS offers a unique protection mechanism where individual portfolios remain intact, insulating investors from collective redemption pressures, unlike in the case of mutual funds. However, this individualised approach comes with substantial tax complexities. Investors must meticulously track every transaction, accounting for capital gains, dividends and associated expenses.
Mutual funds, in contrast, by pooling resources from multiple investors, offer lower entry barriers with simplified tax treatment. Transactions by funds are free from capital gains tax. Only when investors redeem a fund, do they have to pay capital gains tax.
The newly introduced SIF is seen as combining the best of both. As SIF is a mutual fund product, it is more tax-efficient. But, unlike traditional mutual funds, SIF can take more risks including using derivatives.
From an investor's perspective, SIFs address multiple issues that have long plagued Indian investors—lack of flexible investment strategies and limited customisation options for MFs while imposing high entry barriers for PMS.
To protect investor interests, SEBI has implemented strict guidelines to minimise potential risks. The regulations impose limits on investment concentrations. For debt instruments, funds can invest up to 20% of their net asset value (NAV) in a single issuer's securities, extendable to 25% with trustee approval. Equity investments face even more stringent controls, with no strategy allowed to invest more than 10% of its NAV in a single company's equity shares, and ownership of voting capital capped at 15% across all SIF strategies.
Fund managers overseeing SIFs must possess specific certifications from the National Institute of Securities Markets which are now not required for MFs. Asset management companies must adhere to strict branding, advertising and disclosure requirements. Offer documents must comprehensively inform investors about the high-risk nature of these investment strategies.
Additionally, SEBI has set restrictions on investments in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), limiting total investments to 20% of NAV with a 10% cap per issuer. This measure further demonstrates the regulator's commitment to maintaining balanced and controlled investment environments.
While SIFs have been hailed as revolutionary, potentially undermining PMS, it remains to be seen whether fund managers can have a strategy for SIFs, totally different from MFs.