SEBI amended the SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) on December 16, 2024, to introduce Specialized Investment Funds (“SIFs”) as a new asset class bridging the gap between Mutual Funds (“MFs”) and Portfolio Management Services (“PMS”) in terms of portfolio construction. Proposed in July 2024 to prevent investors from turning to unregulated entities, SEBI extended the mutual fund framework to SIFs, ensuring better governance, risk mitigation, and investor protection, addressing concerns over the high ticket size of PMS and the lower risk appetite of Mfs.

In line with the amendment, SEBI issued a circular on February 27, 2025 (accessible here), providing modalities for SIFs. The SIF regime is effective April 1, 2025.

Key Features of SIFs

1. Eligibility Criteria

The SIF license shall be granted by SEBI to an existing MF meeting the eligibility criteria under one of the following routes:

1. Route 1: It has an operational track record of at least 3 years of handling average Asset Under Management (“AUM”) of not less than INR 10,000 crores; or
2. Route 2: Appointed a Chief Investment Officer for SIF with fund management experience of at least 10 years and has managed an average AUM of not less than INR 5000 crores. Further, the AMC has appointed an additional fund manager for SIF with fund management experience of at least 3 years and has managed an average AUM of not less than INR 500 crores.

Further, irrespective of the route under which the application is made, it should be ensured that no action has been initiated or taken against the sponsor/Asset Management Company (“AMC”) under Section 11, 11B and/or Section 24 of the SEBI Act, 1992 during the last 3 years.

SEBI has also permitted the sharing of resources of AMC across MF and SIF.

2. Branding and Advertisement

MF Regulations provides that an AMC should maintain a clear distinction between its SIF business and mutual fund business. Accordingly, AMC shall maintain a distinct brand name and logo along with a separate website and/or dedicated webpage for the two businesses. However, the AMC may use the sponsor or the mutual fund’s brand name in offer documents, promotional documents and advertisements for an initial period of 5 years from the date of SEBI’s approval for the launch of SIF, provided adequate disclaimer and distinction are maintained in the manner prescribed by SEBI.

3. Investment Strategies

The schemes of SIF have been termed as Investment Strategy which can be launched in the manner prescribed for mutual funds. Presently, SIF can launch only one Investment Strategy under each category. A brief summary of the categories of investment strategy is captured below:

Category	Long (minimum unless specified)	Short (unhedged derivative position) (Maximum unless specified)	Redemption Frequency
Equity-Oriented Investment Strategies
Equity Long- Short Fund	Equity & Equity related instruments: 80%	Equity & Equity related instruments: 25%	Daily
Equity Ex-Top 100 Long-Short Fund	Equity & Equity related instruments of stocks excluding top 100 stocks by market capitalization: 65%	Equity & Equity related instruments of other than large cap stocks: 25%	Daily
Sector Rotation Long-Short Fund	Equity & Equity related instruments related of stocks of maximum 4sectors: 80%	Equity & Equity related instruments: 25%[short exposure shall apply at sector level covering all stocks within that sector held in the portfolio]	Daily

Debt-Oriented Investment Strategies
Debt Long- Short Fund	Debt instruments across duration, including unhedged short exposure through exchange-traded debt derivative instruments		Weekly or lesser
Sectoral Debt Long-Short Fund	Debt instruments of at least two sectors, with maximum investment of 75% in a single sector.	Debt instruments: 25%[short exposure shall apply at sector level covering all stocks within that sector held in the portfolio]	Weekly or lesser
Hybrid Investment Strategies
Active Asset Allocator Long- Short Fund	Dynamic allocation across equity, debt, equity and debt derivatives, REITs / InvITs and commodity derivatives	Equity and Debt instruments: 25%	Twice in a week or lesser
Hybrid Long- Short Fund	Equity & Equity related: 25%Debt instruments: 25%	Equity and Debt instruments: 25%	Twice in a week or lesser

4. Restrictions on Investments

All investment restrictions as specified in the Seventh Schedule of MF Regulations apply to SIF, other than as specified below:

Particulars	Investment Restrictions
Investment in debt and money market instruments	Securities rated AAA ≤ 20% of the NAVSecurities rated AA ≤16% of the NAVSecurities rated A or below ≤ 12% of the NAVThe limits can be increased by 5% with the approval of trustees of MF and board of AMC.
	Maximum exposure in a sector ≤ 25% of the NAV.Single Issuer ≤ 20% of NAV in issuer rated below investment grade [increased to 25% with approval of trustee and AMC].
	Investment in mortgage backed securitized debt which are rated not below investment grade by a credit rating agency, can be made within the limit stated above.
	The limit does not apply for investment in G Sec, T- Bill, tripartite repo for G-Sec or T-Bill, debt exchange- traded funds.
Exposure to Derivatives	Exchange traded derivative instruments ≤ 25% of the NAV, for purposes other than hedging and portfolio rebalancingExposure to derivatives shall be computed as follows:Futures (long and short) = Futures Price * Lot Size * Number of ContractsOptions bought = Option premium paid * Lot size * Number of contracts

	Options sold = Market price of the underlying * Lot size* Number of contractsIn case of any other derivative exposure, the exposure shall be calculated as the notional market value of the contract
Total Exposure in instruments	Sum of all exposure in cash + derivative + debt + other permissible instruments cannot be more than 100% of net assets.Offsetting permitted as per below:Cash and derivative – same underlying securityDerivative position –same underlying security
Exposure to Paid-up capital of a company	≤ 15% of paid-up capital carrying voting rights across MF + SIF put together
Investment in Single issuer – Equity	≤ 10% of NAV in a single issuer company
REIT & InvIT	≤ 20% of NAV in REITs and InvITs≤ 10% of REITS and InvITs across MF + SIF for such funds issued by single issuerThe limits do not apply for investments in the case of index funds or sector or industry-specific schemes pertaining to REIT and InvIT.

5. Minimum Investment Threshold

SIFs shall not accept investments of less than INR 10 lakhs across all SIF strategies. However, such threshold shall not apply to accredited investors. In case investment of an investor falls below the threshold due to passive breaches such as a decline in NAV, the investor shall only be permitted to redeem the entire investment amount.

6. Subscription and Redemption of Units

The SIFs can be open-ended, close-ended or interval investment strategies. The subscription and redemption frequency can be distinct and on a daily, weekly, fortnightly, monthly, quarterly, annually, fixed maturity or other suitable intervals. Further, on redemption, the investor shall receive the redemption amount at the end of the notice period which shall be a maximum of 15 working days.

In order to provide liquidity for close-ended and interval investment strategy, the units of such investment strategies shall be mandatorily listed. Investment Strategy permitting other than daily subscription/redemption is classified as an interval investment strategy.

7. Benchmarking and Disclosures

The SIF shall follow a single-tier benchmarking structure. However, the AMC may at its discretion allow the SIF to follow a second-tier benchmarking for the investment strategies. The first tier reflects the category while the second demonstrates the investment style.

The SIF shall disclose the portfolio including derivative positions, in an easily downloadable spreadsheet format, on the SIF website as well as on the AMFI website within 10 days of the end of each alternate month. Further, the scenario analysis shall form part of the Investment Strategy Information Document (“ISID”). Additionally, all the offer documents (ISID, KIM and SAI) shall be disclosed publicly on the SIF website and AMFI website.

Moreover, the following standard warning should be provided in all advertisements and promotional documents in legible fonts with no additions and deletions:

“Investments in Specialized Investment Fund involves relatively higher risk including potential loss of capital, liquidity risk and market volatility. Please read all investment strategy related documents carefully before making the investment decision.”

8. Risk Band

AMC shall utilise the risk band comprising of five levels of risk (1 to 5 depicting lowest risk to highest risk) to depict a pictorial risk meter indicating risk associated with a particular investment strategy. The risk band shall be evaluated on a monthly basis and shall be disclosed on the SIF website as well as the AMFI website within 10 days of the end of the month. Any change in the risk band shall be informed through notice-cum-addendum.

Further, the risk level and the number of times the risk level has changed shall be disclosed on a yearly basis on the SIF website and the AMFI website.

9. Distribution of SIF

An entity engaged with sales and distribution of mutual fund products may distribute SIF, provided it has cleared the NISM Series XIII: Common Derivatives Certification Examination

Comparison of SIF with other investment products

Sr.No.	Feature	MF	SIF	PMS	AIF
1.	MinimumInvestment	INR 500	INR 10 lakhs	INR 50 lakhs	INR 1 Cr
2.	Customisation	Low	Low	High	High
3.	Liquidity	High	Medium	Low	High*
4.	Strategies	Limited	Limited	Flexible	Flexible
5.	RegulatoryOversight	High	High	Low	Low

* Assuming investments in such instruments as permitted for SIF. In other instances of investment in unlisted securities, the liquidity may be low.

Conclusion

The framework for SIF is a welcome move as it marks a significant development in India’s investment landscape by bridging the gap between traditional mutual funds and PMS. By offering a structured yet flexible investment avenue for sophisticated investors, SIFs strike a balance between risk and return while ensuring robust regulatory oversight under SEBI MF Regulation while bringing further dynamism in the securities market.

Authors: Pratham Darad (Principal Associate) and Akanksha Dutta (Associate) (Funds, Asset Management and Regulatory Practice)

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