SIFs, a new asset class, allows investors to enhance returns, diversify risks

Discretionary portfolio managers have grown by ₹4.26 lakh crore since then. And even mutual fund investors have discovered the power of risk-adjusted returns through categories such as balanced advantage funds ( ₹2.9 lakh crore of assets under management) and multi-asset funds ( ₹4.33 lakh crore of AUM).

The Securities and Exchange Board of India recently notified a new asset class: the Specialised Investment Fund (SIF), which, with a minimum investment of ₹10 lakh, sits between mutual funds and portfolio management services. And I’m just as optimistic about this new asset class as I was when I created the first AIF in 2012.

Both existing mutual funds with ₹10,000 crore of AUM and three years of track record and specialised investment managers can start launching SIFs from April 1. So here is a little bit of crystal-ball gazing on potential products and what they can do for your portfolio.

My top idea is the return of structured products via the SIF route. These funds could offer periodic subscriptions and redemptions, capital protection, and, as on date, 30-70% of the upside of the Nifty.

Psychological comfort

Structured product SIFs appeal to the Indian investor who wants the psychological comfort of capital preservation and the benefit of equity upside. These funds will be taxed favourably – like an equity mutual fund – will not have the credit risk of lending to an NBFC and can offer investors daily liquidity via the listing of units even though the fund itself will open only periodically.

Mid and small caps have been an investor favourite since the pandemic. But the ongoing market correction has reminded us that the road to wealth creation can be filled with painful potholes.

Equity ex-top 100 long-short SIFs will allow fund managers to short overvalued mid-caps or even buy copious amounts of put options to protect capital in a mid and small cap meltdown.

India has always been a stock-picker’s market. Just as there are opportunities for fund managers to find stocks that will outperform, there are an equal number of opportunities to find stocks that will underperform.

Historically, equity fund managers have only been able to go for underweight stocks to the extent that they are present in benchmarks. But with equity long/short SIFs, managers can fully express their negative views on stocks and sectors by shorting them, thereby delivering stronger outperformance to unitholders.

The concept of long/short extends beyond just equities and goes into the multi-asset and hybrid arena. SIFs have the opportunity to create a world-class absolute return offering that can bet on rising and falling prices across equities, debt, commodities, InvITs (infrastructure investment trusts) and REITs (real estate investment trusts).

If someone can create an offering that consistently delivers low-teen returns with low volatility, the sky is the limit in terms of investor appetite! For an emerging high net worth individual, this offering may compete with riskier fixed-income-plus solutions and even offer them a spread over their home loan EMI rate.

Similarly, multi-asset arbitrage and special-situation offerings can offer compelling returns for a low-risk investor looking to park money for a one-year-plus time frame.

Debt funds

The debt category has also been opened to innovation. SIFs will be able to offer concentrated debt funds with up to 20% in a single issuer and up to 75% in a single sector.

Under this regime, a debt fund that invests in high-grade NBFCs becomes possible, as does a fund that only buys bonds of Tata companies. And this is a vital bridge in the development of India’s corporate bond market.

Debt SIFs have also been allowed to trade derivatives, which encourages institutional participation and development of India’s interest rate futures and credit default swap markets. A debt SIF could potentially run a negative duration, which means it gains when interest rates rise.

A fund like this is an incredible diversifier in an investor’s portfolio, which otherwise only has holdings that gain from falling interest rates.

SIFs benefit from the strong governance oversight of mutual fund boards, stringent risk management norms, professional fund management and the same taxation as a regular mutual fund. Advisors are required to upskill via an NISM (National Institute of Securities Markets) exam before distributing these products to their clients. Good financial advice has never been more valuable.

As with all innovation, it is important for investors to gradually build confidence and allocations in SIFs. Accredited investors have a tremendous advantage because they can invest less than a combined ₹10 lakh per AMC and hence, they can sample a variety of offerings from several fund houses. 

SIFs will move from a satellite to a core allocation once fund houses have built live track records and battle-test strategies in tough market conditions.

But in the meantime, the new asset class throws up many new opportunities for investors to enhance their returns, diversify their risk and have greater certainty about their financial goals.

Nalin Moniz is CEO of Ionic Asset Management