SEBI's Regulatory Framework for Specialized Investment Funds (SIFs)

The Securities and Exchange Board of India (SEBI) has released a consultation Paper
on the draft securities market regulation for Specialized Investment Funds (SIFs), with an anticipated effective date of April 1, 2025. This framework is designed to bridge the gap between mutual funds (MFs) and portfolio management services (PMS), providing sophisticated investors with enhanced flexibility while maintaining regulatory oversight.

Eligibility Criteria for SIFs

SEBI-registered mutual funds may establish SIFs through one of the following routes:

1. Track Record-Based Eligibility: The sponsoring mutual fund must have operated for at least three years with an average Assets Under Management (AUM) of ₹10,000 crore over the past three years. Additionally, no regulatory actions should have been initiated against the sponsor or asset management company (AMC) under the SEBI Act during this period.
2. Experience-Based Eligibility: The AMC must appoint a Chief Investment Officer (CIO) with a minimum of 10 years of experience managing ₹5,000 crore in assets and a fund manager with at least three years of experience managing ₹500 crore. As with Route 1, the sponsor or AMC must have maintained a clean regulatory record for the past three years.

Key Features of the SIF Framework

Minimum Investment Requirements

• Investors must maintain a minimum investment of ₹10 lakh, applicable across all SIF investment strategies on a PAN-wise basis.
• Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs) are permitted, provided the total investment remains above the threshold.
• Accredited investors are exempt from the minimum investment requirement.

Investment Restrictions

• An individual investment strategy within an SIF cannot allocate more than:
  
  • 20% of its Net Asset Value (NAV) in AAA-rated debt and money market securities issued by a single entity.
  • 16% in AA-rated securities.
  • 12% in A-rated and below securities.
• Sectoral exposure is capped at 25% of the NAV.
• These limits may be extended by up to 5% with prior approval from the mutual fund’s trustees and the AMC’s board.

Investment Strategies

SIFs will offer a range of investment strategies across equity, debt, and hybrid asset classes, including:

Equity-Oriented Strategies

1. Equity Long-Short Fund: Minimum 80% allocation to equity and equity-related instruments; maximum 25% unhedged derivative exposure.
2. Equity Ex-Top 100 Long-Short Fund: At least 65% investment in stocks outside the top 100 by market capitalization; maximum 25% unhedged derivative exposure.
3. Sector Rotation Long-Short Fund: Minimum 80% allocation to equity from up to four sectors; maximum 25% unhedged derivative exposure.

Debt-Based Strategies

• Debt long-short funds
• Sectoral debt long-short funds

Hybrid Investment Strategies

• Hybrid long-short funds

To prevent fund proliferation, SEBI has limited each AMC to one investment strategy per category.

Subscription, Redemption, and Listing

• SIFs may operate as open-ended, close-ended, or interval funds.
• Subscription and redemption intervals will be determined based on investment strategy.
• Redemption notice periods can extend up to 15 working days.
• Closed-ended and interval funds must be listed on stock exchanges.

Benchmarking

• SIFs will implement a single-tier benchmark system.
• Equity-oriented strategies will be benchmarked against broad market indices such as the BSE Sensex, NSE Nifty, BSE 100, or CRISIL 500.
• Debt-oriented strategies will be compared with appropriate debt indices.
• Hybrid strategies will be benchmarked against relevant composite indices.

Branding and Marketing

• AMCs must establish separate branding for SIFs, distinct from mutual funds.
• The sponsor’s brand name may be used for up to five years but must include qualifiers like “brought to you by” or “offered by.”
• SIFs must maintain dedicated websites or web pages to avoid confusion with mutual fund schemes.
• The SIF brand name must be prominently displayed in promotional materials, equal to or larger than the mutual fund brand name.

Risk Management

• Risk levels will be categorized into five bands and reviewed monthly.
• SIFs may hold up to 25% of their net assets in exchange-traded derivatives for non-hedging purposes.
• Cumulative gross exposure across cash and derivative markets must not exceed 100% of net assets.

Disclosure Requirements

• SIFs must provide comprehensive disclosures on their portfolio, liquidity risks, and scenario analysis.
• Advertisements must include a standardized risk disclaimer.

SEBI’s new regulatory framework for SIFs aims to enhance transparency, improve investor protection, and offer greater flexibility to sophisticated investors. By implementing stringent risk management measures and clear branding distinctions, the framework seeks to create a well-regulated investment space for specialized funds while bridging the gap between mutual funds and PMS offerings.