SEBI Launches Specialized Investment Funds for Informed Investors

On Tuesday, the Securities and Exchange Board of India (SEBI) introduced a new investment vehicle called the 'Specialized Investment Fund' (SIF). This asset class is positioned between Portfolio Management Services (PMS) and mutual funds, requiring a minimum investment of ₹10 lakh and accommodating various investment strategies.

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Why SIFs Were Introduced

SIFs aim to address a longstanding gap in India’s investment ecosystem. While mutual funds provide a low-barrier, diversified option for conservative investors, and PMS caters to high-net-worth individuals (HNIs) with significant capital and custom strategies, there has been a need for a middle ground. SIFs fulfill this role by targeting informed investors who are open to higher risks in pursuit of greater returns.

Key Benefits of SIFs

By setting a minimum investment threshold of ₹10 lakh, SIFs cater to HNIs and experienced investors with the financial knowledge and capacity to handle riskier investments. This new category offers more flexibility and potential for higher allocations in specific securities, which traditional mutual funds do not permit. For example:

• Equity Allocation: SIFs can allocate up to 15% of their total assets to a single company, compared to the 10% cap in mutual funds.
• Debt Instruments: They allow up to 20% exposure to a single issuer, extendable to 25% with board approval.
• REITs and InvITs: SIFs may invest 20% of assets in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), capped at 10% for individual issuers.

Enhanced Flexibility and Controls

Unlike mutual funds, SIFs permit a broader range of strategies, including higher allocations to equities, fixed-income securities, and alternative assets like REITs and InvITs. However, SEBI has imposed strict limits to mitigate risk. For instance:

• A single issuer’s exposure in debt cannot exceed 20% of the fund's assets unless extended to 25% through board approval.
• Equity investments are limited to 15% of a company's paid-up capital with voting rights, and no more than 10% of a fund’s NAV can be allocated to any single equity issuer.
• For REITs and InvITs, the fund can allocate up to 20% overall but no more than 10% per issuer.

SEBI also requires asset management companies (AMCs) offering SIFs to maintain robust risk management frameworks, internal controls, and specialized expertise. This ensures that SIFs are responsibly managed and do not expose investors to excessive risk.

A Distinct Identity

To differentiate SIFs from mutual funds, SEBI has mandated that fund houses employ separate branding, advertising, and disclaimer practices. Additionally, distinct websites for mutual funds and SIFs must be maintained to avoid confusion among investors.

By bridging the gap between mutual funds and PMS, SIFs create a new avenue for informed investors seeking a balance of flexibility, higher return potential, and manageable risk. This innovation in asset management could reshape India’s investment landscape.