Treat these novel strategies as diversifiers, not as core holdings

Treat SIFs as satellite holdings, not replacements for core mutual fund holdings, as management and threshold compliance risks remain

Specialised investment funds (SIFs) launched by fund houses have crossed ₹10,000 crore in assets under management (AUM). Fund houses began launching them in late August 2025. Twenty funds are available currently. They are emerging as a more sophisticated category positioned between mutual funds on the one hand, and portfolio management services (PMS) and alternative investment funds (AIFs) on the other.  

Key features 

Investors can begin investing in mutual funds with as little as ₹100. “SIFs require a minimum investment of ₹10 lakh per investor at the permanent account number (PAN) level across all SIF strategies under one asset management company (AMC),” says Manish Gadhvi,  chief executive officer (CEO), FundsIndia B2B. Fund managers can take unhedged short positions of up to 25 per cent. 

Pros and cons  

A long-short strategy can provide a hedge during bear markets. These funds can perform, or at least provide downside protection, in falling markets. 

SIFs can, however, be more volatile than traditional mutual funds. In a long-only strategy, the downside is capped at the value of what the investor owns. “In a long-short fund, losses can be significant and fast if a shorted stock rises instead of falling,” says Gadhvi. Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com adds that a long-short strategy can create double-sided losses if long positions fall while short positions rise. In these funds, risk comes from both stock selection and timing.  

“Remember that complexity does not automatically mean superior returns,” says Manuj Jain, co-founder, ValueMetrics Technologies, which provides valuation-based analysis across asset classes. 

Liquidity and execution risks 

Investors may not be able to exit these funds as quickly as they can from an open-end mutual fund. “Many SIFs are interval funds, which investors cannot exit on demand,” says Gadhvi. 

Execution risk is high in these funds. “The outcome depends heavily on the fund manager’s ability to call long and short positions correctly,” says Gadhvi. 

Investors are also subject to threshold-compliance risk. “An AMC may mandate full exit if an investor’s investments fall below ₹10 lakh,” says Gadhvi. 

Mutual fund distributors may not be able to explain these products properly to investors as very few are currently certified in derivatives.  

Since these funds are new, they lack a comprehensive track record across economic cycles. 

Risk varies by strategy 

Some SIF strategies are low-risk, while others are high-risk. Debt-and-arbitrage SIFs with zero net equity exposure sit at the lower end of the risk spectrum.  

Debt-oriented long-short funds and hybrid active asset allocators are relatively lower risk. “They prioritise hedging and capital preservation,” says Kumar. 

All market-neutral or hedged approaches would be lower risk, as they would focus more on reducing portfolio volatility.  

Pure-equity long-short SIFs, on the other hand, sit at the higher end of the risk spectrum. “Directional long-short or thematic concentrated strategies can carry relatively higher risk because of greater market exposure and volatility,” says Chinmay Sathe, chief investment officer (CIO)-SIF, The Wealth Company Mutual Funds. 

“Aggressive SIF strategies may carry up to 25 per cent unhedged short exposure, which can lead to significant losses if tactical market calls prove incorrect,” says Kumar. Jain adds that directional long-short exposure, especially in ex-top 100 stocks, may witness sharper swings as these funds would focus on the more volatile mid-cap and small-cap segments. Strategies focusing on tactical sector rotation would also be riskier. 

Major categories 

Mutual fund analytics platform Value Research has categorised the SIFs launched so far into four categories. 

SIF Equity Long-Short: These funds must invest at least 80 per cent in equity and equity-related instruments. “They seek to offer better risk-adjusted returns through partial market hedges and short positions to protect downside,” says Gaurav Kulshrestha, CIO, Nexedge Capital. 

These funds can generate returns in both rising and falling markets. “They could also have lower drawdowns than long-only equity funds if executed well,” says Kulshrestha. Investors seeking aggressive hedge-fund-like strategies within a regulated structure may consider them. 

SIF Ex Top 100: These funds must invest at least 65 per cent in ex-top 100 stocks, which means midcap and smallcap stocks. 

“These funds provide access to alpha-rich segments beyond largecaps,” says Kulshrestha. He adds that shorting can hedge the downside in these volatile segments. 

However, this strategy carries higher volatility and liquidity risks. “Execution challenges are greater in shorting less liquid names,” says Kulshrestha. These segments also tend to underperform during risk-off phases. 

“Investors who have a higher risk appetite, seek higher returns, and have a long horizon may go for them,” says Kulshrestha.

SIF Hybrid Long-Short: These funds combine equity long-short strategies with fixed-income and arbitrage positions. Funds must have minimum exposure of 25 per cent to each of the two segments: equity and debt. 

Multi-asset exposure can translate into lower volatility and allow the category to perform across market environments. However, these funds could underperform in strong bull markets. Fund managers need to get both allocation decisions and long-short calls right. “Investors seeking stability with moderate growth may consider them,” says Kulshrestha. 

SIF Active Asset Allocator Long-Short: These funds can allocate dynamically across equity, debt, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and commodities.  

These funds offer multi-asset diversification and dynamic allocation. They are well suited for navigating different macro regimes and can reduce drawdowns meaningfully. “Their performance is dependent on asset allocation decisions. They also carry timing risks,” says Kulshrestha. 

Investors looking for an actively managed all-weather portfolio may consider them. 

Checks to run 

Examine the investment strategy information document (ISID) and understand the fund’s strategy. 

A fund may be labelled long-short, but the fund manager may effectively run a long-only portfolio. Sebi has capped short exposure at 25 per cent of net asset value (NAV), but has set no minimum limit on it. “Investors could end up paying a higher cost for these complex strategies without receiving short-side protection or alpha,” says Gadhvi. 

Jain adds that investors should also understand whether derivatives are being used for hedging or to take aggressive directional bets. Also assess the fund manager’s skill and experience in managing short-selling strategies.  

Understand the fund’s liquidity structure, since many could have restricted redemption windows. “Many SIFs allow withdrawals only weekly, monthly or quarterly instead of daily,” says Kumar. 

Study each fund's fee structure, exit load, and taxation. “Those with more than 65 per cent equity exposure will qualify for equity mutual fund taxation,” says Gadhvi. 

What should you do 

Various derivative-based strategies can serve different objectives. “Select a product that aligns with your risk appetite and investment objective,” says Jain. 

Invest with at least a three-year horizon. These funds are still new and need a full market cycle before they can be properly assessed.  

“Treat SIFs as portfolio diversifiers rather than as replacements for core investments,” says Sathe. 

Finally, avoid allocating beyond your risk tolerance. “Treat SIFs as tactical supplements and limit allocation to roughly 10–15 per cent of the total portfolio,” says Kumar.

 

 

(The writer is a Mumbai-based independent journalist)