Cap your SIF exposure at 10-15 per cent, commit to a three-year horizon

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 Rs 10,000 crore in assets under management (AUM). Fund houses started launching them in late August 2025. Currently, there are 20 funds in this category. They are emerging as a new, more sophisticated category between mutual funds and hedge-fund-like strategies, offering investors access to long-short and derivative-driven approaches.

 

With higher entry thresholds and complex structures, SIFs are designed primarily for informed, affluent investors seeking diversification and tactical opportunities. Investors should assess their suitability and understand the risks before investing.

 

Entry requirements: SIFs versus mutual funds

 

SIFs require higher minimum investments than mutual funds, making them suitable for investors with larger surpluses and better market understanding. “Mutual funds are highly accessible, starting from around Rs 100, while SIFs are premium products requiring a much higher minimum investment of Rs 10 lakh,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.

 

According to Manish Gadhvi, chief executive officer (CEO) of FundsIndia B2B, SIFs target investors with meaningful capital, but remain more accessible than portfolio management services (PMS), which require at least Rs 50 lakh, and alternative investment funds (AIFs), which require at least Rs 1 crore.

 

Who should invest in SIFs?

 

Conservative investors or those looking for simple, long-term wealth creation through traditional products should go for conventional mutual funds. “SIFs are best suited for informed investors seeking differentiated strategies and portfolio diversification,” says Chinmay Sathe, chief investment officer (SIF), The Wealth Company Mutual Funds.

 

“SIFs are meant for experienced high-net-worth individuals (HNIs) with Rs 50 lakh or larger portfolios who can manage volatility. They are unsuitable for retail investors with limited savings, low risk appetite, or short-term horizons,” says Kumar.

 

He adds that as these funds use complex derivative strategies, they should complement a mature portfolio rather than serve as a starting point for new investors.

 

Understand the strategies

 

Value Research has classified SIFs into four categories.

 

SIF Equity Long Short primarily invests in equities, with a minimum allocation of 80 per cent and up to 25 per cent unhedged short exposure to improve risk-adjusted returns. “This structure allows participation in market upside while using shorts to protect downside, rather than relying purely on market direction,” says Gaurav Kulshrestha, chief investment officer, Nexedge Capital.

 

This strategy can deliver returns across market cycles and reduce drawdowns, but it depends heavily on the fund manager’s skill and involves greater complexity. Sophisticated investors seeking aggressive, hedge-fund-like exposure as a satellite allocation may consider this strategy.

 

SIF Ex Top 100 Long Short targets midcap and smallcap stocks beyond the top 100 companies, combined with long-short strategies. “Greater inefficiency in this segment creates opportunities for alpha, but also brings higher volatility and liquidity challenges,” says Kulshrestha.

 

This strategy offers higher return potential and hedging benefits, but is prone to sharper swings and execution risks. It suits high-risk investors with a long-term horizon.

 

SIF Hybrid Long Short blends equity long-short with debt and arbitrage strategies to balance growth and stability. “This approach aims to smooth returns across cycles by combining multiple asset classes with tactical positioning,” says Kulshrestha.

 

This strategy has lower volatility and better risk-adjusted return potential. However, it may underperform in strong bull markets and adds allocation complexity. It suits investors seeking moderate growth with stability.

 

SIF Active Asset Allocator Long Short dynamically allocates across asset classes with long-short flexibility based on macro signals. “It’s essentially an actively managed, all-weather strategy that adapts to changing market regimes,” says Kulshrestha.

 

This strategy offers strong diversification and drawdown-control potential, but depends heavily on asset allocation calls and timing. It suits investors who are comfortable delegating asset allocation for a dynamic, multi-asset portfolio.

 

Risk spectrum of SIF strategies

 

According to Manuj Jain, co-founder, ValueMetrics Technologies, lower-risk strategies include market-neutral or hedged approaches that reduce volatility. “Higher-risk strategies include directional long-short and sector rotation bets, which can see sharper swings and higher risk than traditional mutual funds,” says Jain.

 

According to Kumar, relatively lower-risk SIF strategies also include debt-oriented long-short funds and hybrid active asset allocators that prioritise hedging and capital preservation to smooth returns.

 

“Debt-and-arbitrage SIFs with zero net equity exposure target around 6.5–7 per cent returns, similar to fixed deposits but with better tax efficiency. Hybrid long-short SIFs sit in between. They stayed positive during the second half of 2025 correction due to debt cushioning,” says Gadhvi.

 

“Higher-risk strategies include equity long-short, sector rotation, and Ex-Top 100 plays in volatile midcap and smallcap stocks, with up to 25 per cent unhedged shorts that can amplify losses if calls go wrong,” says Kumar.

 

Key risks in SIFs

 

Performance depends heavily on the manager’s derivatives expertise. Gadhvi says that manager risk is higher, as SIF performance depends on getting both long and short calls right. Poor execution can erode capital.

 

Many SIFs, particularly in the hybrid long-short category, are structured as interval funds. “You cannot exit on demand. If markets fall sharply and you need to act, you may have to wait for the next redemption window,” says Gadhvi.

 

Threshold compliance risk is unique to this product. “If your investment drops below Rs 10 lakh, the asset management company (AMC) may require a full exit; partial holdings below the minimum aren’t allowed,” says Gadhvi.

 

Gadhvi adds that limited derivatives expertise among distributors restricts guidance, shifting more due diligence onto investors.

 

As a new category in India, most SIFs lack long-term track records, making their performance amid market stress hard to predict. “SIFs are still new. They have a limited track record, making it difficult to assess performance across cycles,” says Gadhvi.

 

Wrong positioning on either side of the trade, sharp market reversals, or short-covering rallies can lead to additional volatility. “Investors should understand that ‘complex’ does not automatically mean ‘superior returns’,” says Jain.

 

Pre-investment checks

 

Read the Investment Strategy Information Document (ISID) carefully. “Sebi caps short exposure at 25 per cent of net asset value (NAV) but sets no minimum, meaning a fund can technically run zero short positions and still carry the ‘long-short’ label. Confirm how actively the strategy is actually being deployed before you invest,” says Gadhvi.

 

Investors should check the fund’s mandate, such as equity or hybrid, as it determines volatility. “One strategy may use derivatives to create a market-neutral or hedged portfolio, while another may use them to take aggressive directional bets on both the long and short side of the market. Hence, product selection must align with the investor’s own risk appetite and investment objective,” says Jain.

 

Understand the liquidity structure. “Many SIFs have limited redemption windows, unlike the daily liquidity of regular mutual funds,” says Gadhvi.

 

Investors should also examine the fee structure and exit load. “Some SIFs levy up to 1 per cent exit load within a year; factor this into return expectations,” says Gadhvi.

 

A strong AMC brand is not enough. Investors should assess the manager’s short-selling experience, as it can reveal the real risk of the strategy.

 

Dos, don’ts and common mistakes

 

According to Kumar, investors should treat an SIF as a tactical supplement and limit allocation to roughly 10–15 per cent of the total portfolio, instead of replacing core mutual fund holdings.

 

“Treat SIFs as diversifiers, not core; avoid chasing returns or over-allocating,” says Sathe.

 

Gadhvi says investors should commit to at least a three-year horizon. The category is still new, and a full market cycle is needed to assess performance properly.

 

Understand the tax implications upfront. “SIFs with more than 65 per cent equity exposure qualify for equity mutual fund taxation, which can significantly improve post-tax returns,” says Gadhvi.

 

Investors should not be misled by the “long-short” label. They should verify actual shorting through the ISID, avoid investing short-term funds because of restricted liquidity, and factor in exit loads that can erode returns. 

 

(The writer is a Mumbai-based independent journalist)