SEBI framework for Specialized Investment Funds (SIFs): ₹10 lakh entry, sector caps & more

India’s capital markets regulator SEBI on Thursday introduced a regulatory framework for Specialized Investment Funds (SIFs) requiring a minimum investment threshold of ₹10 lakh per investor across all strategies.

The SIF has been introduced to bridge the gap between mutual funds and portfolio management services (PMS) in terms of portfolio flexibility.

The regulatory framework for SIFs will come into effect from April 1, 2025, and the Association of Mutual Funds in India (AMFI) is required to issue relevant guidelines by March 31, 2025.

Under the framework, SEBI has mandated a minimum investment threshold of ₹10 lakh per investor, aggregated across all investment strategies at the PAN level. Accredited investors are exempt from this requirement.

Systematic investment options such as SIPs, SWPs, and STPs are permitted, but total investments must remain above ₹10 lakh. In case of passive breaches due to NAV fluctuations, the investor can only redeem the full remaining amount.

Investors cannot invest more than 20 per cent (AAA-rated), 16 per cent (AA-rated), or 12 per cent (A-rated and below) in one company's debt securities.

Sectoral investment limits are capped at 25% of NAV.

SEBI said that SIFs may take up to 25% of net assets in unhedged short positions via derivatives, and cumulative exposure across cash and derivatives markets must not exceed 100% of net assets.

Eligibility criteria

Under Route 1, mutual funds with a track record of at least three years and an average asset under management (AUM) of at least ₹10,000 crore over the preceding three years can apply to establish an SIF.

No regulatory action should have been initiated against the sponsor or the asset management company (AMC) under SEBI Act provisions in the past three years.

The alternate route requires the AMC to appoint a Chief Investment Officer (CIO) with at least 10 years of fund management experience and an AUM of at least ₹5,000 crore.

It must also appoint an additional Fund Manager with at least three years of fund management experience and an average AUM of at least ₹500 crore.

Similar to Route 1, no regulatory action should have been taken against the sponsor or AMC in the last three years.

Branding guidelines

SIFs must maintain distinct branding and marketing, separate from their associated mutual funds.

For the first five years, AMCs may use their mutual fund brand name alongside SIF branding, with disclaimers like “brought to you by” or “offered by.”

The font size of the mutual fund brand name in promotional materials must not exceed that of the SIF’s brand name.

Investment strategies and restrictions

SEBI has outlined specific investment strategies for SIFs, including equity long-short, debt long-short, and hybrid investment models. Each strategy will have defined exposure limits, such as a maximum 25% short position through derivatives and a sectoral cap of 25% for debt investments.

The regulator has classified investment strategies with non-daily subscription or redemption frequencies as “Interval Investment Strategies.”

SIFs must follow a single-tier benchmark structure, though AMCs may opt for a second-tier benchmark in line with mutual fund schemes. Equity-oriented investment strategies will be benchmarked against indices like BSE Sensex, NSE Nifty, or CRISIL 500, while debt-oriented strategies will be linked to relevant broad market indices.

Derivative exposure and risk management

SIFs will be allowed to take up to 25% of net assets in exchange-traded derivative instruments for purposes other than hedging, with exposure calculations in line with mutual fund standards. Cumulative gross exposure across cash and derivative markets cannot exceed 100% of net assets.

Risk has been categorised into five levels (Risk Band 1 to 5), to be reviewed monthly.

Subscription and redemption terms

SIFs can operate under open-ended, close-ended, or interval-based structures, with flexibility in setting subscription and redemption frequencies.

Redemptions may require a notice period of a maximum of 15 working days.

Closed-ended and interval funds must be listed on stock exchanges.