SIFs or Specialised Investment Funds have emerged as a new investment option positioned between mutual funds and PMS products. Here is a lowdown on these products and their suitability for investors.
What Are SIFs?
Think of an SIF as a “Mutual Fund +” product. It operates under the mutual fund regulatory framework offering the same transparency, structure, and tax efficiency as traditional mutual funds. However, there is significantly more freedom for fund managers to implement sophisticated, higher-risk investment strategies.
Key Characteristics of SIFs:
- SEBI Regulated: Fully regulated by the Securities and Exchange Board of India
- Minimum Investment: ₹10 lakh (minimum per PAN)
- Professional Management: Managed by experienced fund managers with greater flexibility
- Strategy-Focused: Each SIF is designed with a specific investment mandate
- Advanced Instruments: Can use derivatives, short positions, and complex strategies
- Tax Efficient: Follows mutual fund taxation rules
To truly understand SIFs, you need to understand why SEBI created them and what market conditions they’re designed to address.
The “Moderate Return Period” Problem
According to Sankaran Naren, CIO, ICICI Mutual Fund, and a well-known name in the mutual fund industry, this comes down to one critical insight about market history.
While 2020-2024 was exceptional with equity returns of 15-20%+ annually, this is not the norm historically. Naren points to longer stretches where markets delivered “average or very average” returns:
In the 2008-2013 Period (Post-Financial Crisis) for instance,Nifty 50 delivered essentially 0% returns over the 5-year period (despite a 65% rally in 2009 and 80% rally in 2010), resulting in a CAGR of 0-3% (dividends included). Worse, investors endured extreme volatility—a 65% fall in 2008, followed by violent swings of +65%, +80%, +11%, and +36% in subsequent years. This created the worst of both worlds: high volatility with mediocre returns. A pure equity fund investor would have endured a heart-stopping 60%+ drawdown to return to their starting point after 5 years—uncompensated by meaningful gains.
In a moderate return environment, traditional investment products face challenges:
- Pure equity funds: Still catch full downside volatility, but without compensating high returns to justify the risk
- Bonds and fixed income: Low yields make them unattractive when equities are giving even modest 8-12% returns
- Balanced/Hybrid funds: Mandated allocations lock in equity exposure (typically 65%) even when the manager thinks markets are overvalued
- Multi-asset funds: Required to maintain fixed allocation in commodities, equity, etc.—preventing tactical shifts based on valuation
What product was suitable for moderate return periods? Not pure equity (too volatile for modest returns). Not bonds (too low-yielding). Not hybrid funds (locked into fixed allocations). Answer: Nothing optimal existed until SIFs.
The SIF Solution: Maximum Flexibility As Strategy
SIFs solve this problem through unconstrained flexibility. Instead of being locked into allocations, fund managers can:
- Reduce equity exposure when stocks are expensive (down to 20-30% if needed)
- Increase equity when valuations become attractive (up to 80%+ if warranted)
- Rotate into commodities when they offer better risk-adjusted returns
- Use hedging strategies to reduce downside risk without exiting equities entirely
- Manage volatility dynamically based on market conditions, not static models
- Avoid overvalued assets (like gold, if expensive) rather than being forced to hold them
Well, SIF strategies do fill a gap. How about the cost structure and importantly, risk factors?
Cost Structure
Under SEBI rules, the statutory limits for a SIF’s annual expense ratio typically mirror traditional structures:
- Equity Strategies: Capped at a maximum base TER of 2.25%.
- Debt Strategies: Capped at a maximum base TER of 2.00%
If you look up a SIF scheme’s daily performance sheets, you might notice the expense numbers look incredibly high on certain days. This isn’t an explicit performance fee. This occurs because SEBI implemented strict new TER rules requiring AMCs to include all underlying brokerage, derivative transaction costs, and statutory levies directly into the daily annualized TER. Because SIF long-short strategies execute a massive volume of derivative and unhedged short trades, those heavy trading costs temporarily swell the reported expense ratio on active days.
To understand this, here is an example from the daily expense ratio of iSIF Equity Ex-Top 100 Long-Short Fund for a few days in April :
- April 19: Base TER 1.82% + levies 0.32% = Total 2.14%
- April 21: Base TER 1.82% + levies 0.9% = Total 2.33%
- April 22: Base TER 1.82% + levies 1.19% = Total 2.33%
- April 23: Base TER 1.82% + levies 1.24% = Total 2.33%
- April 24: Base TER 1.82% + levies 6.08% = Total 9.79%
The base fee stays the same. The fund manager’s trading behaviour is what’s increasing the number.
What You Pay:
When you invest the mandatory minimum of ₹10 Lakhs into a SIF:
- You will not be billed a separate profit-sharing fee.
- You will not find a variable performance clause in the Scheme Information Document (SID).
- Instead, the true “cost” of the manager’s aggressive strategy is fully embedded in the daily NAV via the trading-heavy Total Expense Ratio.
Risk in SIFs: Understanding the downside
With greater flexibility and sophisticated strategies come proportionally greater risks. It’s crucial to understand these before investing:
- Higher Volatility and Market Risk
SIFs use leverage, short positions, and concentrated strategies. This leads to higher volatility compared to traditional mutual funds. Your portfolio value can swing dramatically based on market movements and strategy effectiveness.
- Liquidity Risk
Unlike mutual funds with instant redemptions, SIFs can enforce redemption notice periods up to 15 working days.
- Strategy Risk
Complex strategies don’t always work. A long-short strategy that’s profitable in choppy markets might underperform in trending bull markets. There’s no guarantee sophisticated strategies will outperform simpler approaches.
- Lack of Track Record
As a brand-new category (effective April 2025), most SIFs have less than a year of performance history. This makes it extremely difficult to evaluate long-term consistency and behaviour during different market cycles.
SIFs Are Suitable For Investors Who:
- Understand risk-adjusted returns: Not just chasing the highest absolute returns, but optimizing for returns relative to risk taken
- Can tolerate monthly volatility: Comfortable seeing portfolio fluctuations month-to-month while maintaining conviction in the long-term strategy
- Have a genuine long-term horizon: At least 5+ years, ideally 10+ years, to allow strategies to play out across market cycles
- Are experienced investors: Have previously invested in mutual funds, stocks, or more sophisticated products
- Seek moderate returns: Comfortable with 8-12% returns
You Should NOT Invest in SIFs if you:
- Expect HIGH returns: SIFs are not designed to deliver those returns; they optimize for risk-adjusted performance, not maximum growth
- Want capital protection or guaranteed returns: SIFs are NOT safe havens and are fully subject to market risk and volatility
- Need access to capital frequently: The 15-day redemption notice period makes these unsuitable for short-term needs
- Are uncomfortable with monthly fluctuations: If seeing red months bothers you, SIFs aren’t for you
- Don’t understand the strategies: If you can’t explain covered calls or derivative hedging to yourself, avoid the product.
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