Specialized Investment Funds (SIFs) and information about them are popping up like mushrooms after a rainstorm. Thankfully, they are not a retail product, as the minimum investment is Rs. 10 lakhs (that many investors with Crores of net worth consider themselves “retail” and “middle class” is another matter!).
SIFs are supposed to fill the “gap” between MFs and a PMS. It would be a perfect marriage between product manufacturers eager to launch fancy products for a fancy fee and investors who feel they have arrived at the “next level” and want “diversification” with new “opportunities” (read, unfamiliar risks) without ever understanding that complexity and clutter only lead to diworsification.
SIFs can go long and short (speculate on a security’s decline via derivatives* ). They can also leverage (borrow and invest).
* Arbitrage funds invest in hedged derivatives. These would be unhedged (i.e., naked short up to 25% of the portfolio), meaning without a corresponding investment in the cash market.
Compared to a mutual fund, the exposure limits to a single security, sector, or credit risk are higher. That is a higher concentration risk. More details can be found in this Feb 2025 SEBi circular.
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Portfolio composition of SIFs: Flexible strategies: equity long-short, debt long-short, hybrid, sector rotation, thematic, dynamic/tactical asset allocation; can invest in gold, real estate, infrastructure, REITs, private assets; up to 25% NAV in exchange-traded derivatives for non-hedging purposes, as mentioned above. The taxation is like mutual funds.
They can invest in equities, bonds, commodities, REITs, private assets, gold, real estate, and infrastructure.
The redemption frequency varies (daily, weekly, monthly); SIFs can be open-ended, closed-ended, or interval; closed/interval funds may be listed. The higher risk and lower liquidity (relative to MFs) are not welcome signs.
The financial industry has a simple mantra. Attract high-net-worth clients by offering them opportunities for higher returns. Most of the time, these clients believe they have achieved a higher standard of living and invest without fully appreciating the associated risks. The industry promotes the notion that wealthy individuals must take on more risks to diversify and increase their wealth.
The simple fact is that there is no need for an investor to take on increasingly higher risks simply because they can afford to do so financially (emotionally is another matter). High risks always come with multiple unknowns. Since most investors do not bother to read about the risks, they are likely to be disappointed when things turn sour.
We recommend that investors avoid complicated products like SIFs (or PMSes for that matter). SEBI has little experience in this “new asset class”, and they will live and learn along the way (like they have been doing with mutual funds) at the expense of the investor.
Do not complicate your life. It is not worth it. Stick to simple products, such as mutual funds. There is no award for taking on new risks when you can afford to do so. The risk is guaranteed, the reward is not. As we age, we need to simplify our lives.