Specialized Investment Funds: The next investment frontier for an affluent India

Not long ago, the nation needed campaigns like Mutual Funds Sahi Hai and SIPs Sahi Hai to encourage awareness. Today, stockbroking platforms are mandated to caution investors about the risks of futures and options (F&O) trading. This stark shift reflects the evolution of post-pandemic Indian retail investors. In less than five years, this cohort has leapfrogged a decade in terms of capital market participation, risk appetite, and behavioural maturity across market cycles.

India’s household financial assets are growing at a compound annual growth rate (CAGR) of ~12% per Reserve Bank of India (RBI) estimates, with equities and mutual funds capturing a larger portfolio share. Millennials now contribute nearly 25% of mutual fund inflows, showcasing demand for advanced instruments. From FY20 to FY24, mutual fund assets under management (AUM) grew ~24% CAGR, portfolio management services (PMS) ~16%, and alternative investment funds (AIF) commitments ~32%, reflecting robust growth across asset classes.

Historically, mutual funds were viewed as wealth-creation tools, while conventional instruments were synonymous with smart savings. However, mutual funds have transitioned from aspirational to foundational, often replacing conventional instruments, which now rival savings accounts in preference. As mutual funds occupy the must-have seat, the gap between them and higher-ticket offerings like PMS and AIFs has widened significantly.

This gap has left many new-age investors dissatisfied, often steering them toward less-regulated portfolio management propositions. These options expose investors to risks far beyond the market risks they signed up for, creating systemic vulnerabilities. Cracking down on such providers won’t address the root cause: Unmet demand for products positioned higher on the risk-reward curve. Demand inevitably incentivizes supply, often attracting unscrupulous participants in an unregulated environment.

The Securities and Exchange Board of India (Sebi), known for its iron-fisted regulation, investor-centric approach, and innovation-friendly outlook, has risen to the challenge. Enter SIFs—a new, regulated product category offering asset management company-led flexibility in fund management. While SIFs introduce more flexibility at the fund management level, their governance, compliance, and administrative requirements align with global regulatory gold standards.

High-barriers for manufacturers

Sebi’s stringent eligibility framework for setting up SIFs ensures a high barrier to entry for manufacturers. Sponsors must demonstrate a robust financial track record, including positive net worth over five consecutive years, an average annual net profit exceeding ₹5 crore, and capitalization of at least ₹75 crore for the asset management company. 

Senior management must collectively have over 20 years of experience, and sponsors must lock in their ₹75 crore contribution for three years. These are just a few compliances that a new entrant would need to satisfy to be eligible to apply for a licence at the least. This reflects the regulator’s commitment to fostering a stable and credible ecosystem, deterring unqualified entrants while nurturing a robust and innovative asset class.

How SIFs fit in

SIFs fill the gap between mutual funds and the more aggressive PMS and AIF offerings. They provide affluent investors with a regulated, moderately flexible product that balances risk and reward.

Views are personal. Nirav Karkera is the head of research at Fisdom.