Hedge fund-style products to reshape India's $900 bn mutual fund industry

Earlier this year, India's securities regulator introduced SIFs, which allow managers to short stocks, use derivatives and pursue absolute-return strategies once reserved for hedge funds

By Sidhartha Shukla, Alex Gabriel Simon and Ranjani Raghavan

 

A new investment product that brings sophisticated strategies to affluent Indians is set to usher in a fresh era for the nation’s asset managers.

 

Earlier this year, India’s securities regulator introduced specialised investment funds — also called SIFs — which allow managers to short stocks, use derivatives and pursue absolute-return strategies once reserved for hedge funds.

 

The programme opens the door to hedge fund-style strategies for a broader range of investors in India’s booming $900 billion mutual fund industry. Firms from Edelweiss Asset Management Ltd. to SBI Mutual Fund have rushed to start funds under this category, hopeful that they will take the rapidly growing market to the next level.  

 

 

“The last decade was about financialization — getting India to invest,” said Radhika Gupta, chief executive officer of Edelweiss. “The next decade will be about sophistication — teaching investors that risk-adjusted returns matter.”

 

The products are expected to spark a migration from existing offerings known as alternative investment funds — or AIFs — which have higher investment thresholds and tax rates and were typically reserved for the ultra-wealthy. 

 

The new framework, which took effect in April, has a minimum investment of 1 million rupees ($11,400), a tenth of what AIFs demand, and profits are taxed at the same rate as regular mutual funds — roughly 12.5 per cent versus 42.7 per cent for AIFs. 

 

Still, investors are expected to take a cautious approach toward the products, which have no performance track record in India.

 

Aarti Gupta, chief investment officer at the DM Gupta Family Office of the Jagran Group, calls SIFs “a welcome innovation” but says credibility will depend on execution. 

 

“They offer flexibility with structure — a rare combination in India,” she said. “We’ll start selectively. Governance and transparency are key.”

 

Few fund houses have embraced the shift more eagerly than Quant Mutual Fund, whose founder Sandeep Tandon calls SIFs “low-volatility” products that fit the direction of global wealth trends.  

 

“Globally, investors are moving toward preservation, not just growth,” he said. “India’s high net worth investors stayed away from AIFs because they were expensive and tax-inefficient. SIFs fix that.”

 

Quant has led the rollout, with its QSIF Equity Long-Short Fund and QSIF Hybrid Long-Short Fund already launched. New offerings from other fund houses are expected through October, setting the stage for a wave of launches.

 

Tandon expects the category to rival the broader market within a decade. “Based on global experience, SIFs can grow to half the size of India’s active mutual fund segment in 10 years,” he predicts.

 

For regulators, the stakes are high in an industry that is now merging Wall Street ambition with Main Street access. Liberalization in the 1990s and direct investing by bypassing distributors in 2013 unleashed a wave of retail money. The shift in household savings from gold and property to financial assets has gathered pace since the pandemic, with mutual funds emerging as powerful custodians of middle-class wealth. 

 

SIFs mark the transition from long-only investing toward market-neutral and tactical strategies designed to cushion losses. Globally, they mirror US liquid alternative funds and Europe’s UCITS products — vehicles that blur the line between retail and institutional investing, even if they lack the leverage of many hedge funds.  

 

“I think of them as ‘hedge fund-lite’,” said Edelweiss’s Gupta. “This will give consumers a taste of risk-adjusted, absolute-return thinking.” 

 

Yet India’s market structure may temper the early promise. Derivatives trading is restricted to a universe of about 200 stocks, limiting the ability to build diversified, hedge fund-style portfolios. 

 

Quant’s Tandon says the number is “a good starting point,” and the list will eventually swell to about 500. “It’s not like we will grow in isolation; market depth and breadth will also grow,” he said.  

 

Another constraint centers on people. A shortage of quantitative talent and limited experience in running complex long-short books mean most asset managers will face a learning curve before these funds can scale meaningfully. 

 

Still, as more distributors come on board, the funds are set to expand in coming years, according to Mirae Asset Mutual Fund CEO Swarup Mohanty.

 

“SIFs are scalable,” Mohanty said. “In five years, they could form 20–30 per cent of the mutual fund industry.” Mirae plans its first SIF within six months.

 

Several AIF and portfolio management firms — including Alpha Alternatives, Carnelian, and Estee Advisors — have applied for mutual fund licenses, seeing SIFs as more tax-efficient with a greater potential to expand. Nippon Life India has brought in veteran hedge fund manager Andrew Holland to lead its SIF business.

 

At SBI Mutual Fund, the country’s largest asset manager, Gaurav Mehta is positioning his first SIF launch as a conservative, income-oriented hybrid. “There’s a perception that SIFs are aggressive because they use derivatives,” he said. “But derivatives can mitigate risk as much as they can enhance it.”

 

For Sreepriya NS, CEO of Entrust Family Office, the onus is on the Securities and Exchange Board of India to make the new products a success. 

 

“They open alternatives to investors who could never access them before,” she said. “That’s healthy, as long as SEBI’s guardrails remain.”