Specialised Investment Funds: The Future of Wealth Creation in India

The Indian investment landscape is undergoing a transformation with the introduction of Specialised Investment Funds (SIFs), a new category introduced by the Securities and Exchange Board of India (SEBI). Positioned between traditional mutual funds and Portfolio Management Services (PMS), SIFs cater to investors seeking advanced investment strategies without the high capital requirements of PMS or the complexities of Alternative Investment Funds (AIFs). This innovative financial product is expected to bridge the gap between conventional retail investments and sophisticated portfolio management, offering a more nuanced approach to wealth creation.

For a long time, investors in India faced a stark choice when looking to deploy capital. Mutual funds, while widely accessible, were often seen as broad-based investment vehicles that lacked tailored strategies for specific market opportunities. Portfolio Management Services, on the other hand, offered such specialisation but required a minimum investment of ₹50 lakhs, making them inaccessible to most retail investors. Alternative Investment Funds, which could provide exposure to diverse asset classes, demanded even higher minimum investments of ₹1 crore, putting them beyond the reach of many. This left a significant gap in the market—an opportunity for investors with moderate sums of capital but an appetite for more sophisticated investment strategies. SIFs have been introduced precisely to fill this void, allowing investors with a minimum of ₹10 lakhs to access advanced strategies within a regulated, transparent framework.

SIFs are unique in that they function more as a product category rather than an asset class. Unlike PMS, which can be run by independent investment advisors or firms, SIFs can only be launched by mutual fund houses. This ensures that they benefit from the scale and cost efficiencies of mutual funds while providing the specialised expertise that PMS typically offers. The pooling of funds from multiple investors helps keep costs lower than those associated with PMS, where each investor is charged individually based on portfolio performance and capital deployment. Additionally, because SIFs operate under SEBI’s mutual fund framework, they are subject to greater transparency and regulatory oversight, which enhances investor confidence.

The operational framework of SIFs allows them to be structured as open-ended, closed-ended, or interval-based funds. Open-ended SIFs permit continuous inflows and redemptions, providing liquidity to investors who may wish to enter or exit the fund at any time. Closed-ended SIFs, by contrast, lock in investments for a specified period, allowing fund managers to execute long-term strategies without the pressure of redemptions. Interval funds offer a hybrid model, permitting redemptions at predefined intervals. These structures provide flexibility for both investors and fund managers, ensuring that capital allocation aligns with the investment strategy’s goals and time horizons.

One of the most attractive features of SIFs is their ability to deploy capital across a wide range of asset classes, including equities, debt securities, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs). This diversification potential is a key differentiator from traditional mutual funds, which are often constrained by stricter asset allocation limits. SIFs offer higher allocation thresholds, with a cap of 15% in a single security compared to the 10% limit in mutual funds. Fixed-income strategies can allocate up to 20% to a single issuer, with the potential to extend to 25% with board approval. REIT and InvIT investments are also expanded, allowing up to 20% exposure, doubling the limits imposed on mutual funds.

SEBI has implemented stringent diversification rules to ensure that SIFs do not become overly concentrated in any single asset or sector. Equity investments in a single company are capped at 10% of total assets, while exposure to REITs and InvITs from a single issuer cannot exceed 10%. This approach balances risk and reward, ensuring that investors benefit from sophisticated strategies without taking on excessive exposure to any one area. These diversification mandates help mitigate concentration risk and create a more resilient investment structure.

Another key advantage of SIFs is their cost structure, which mirrors that of mutual funds rather than PMS. Instead of individualised performance-based fees, SIFs operate on a transparent expense ratio system. The fees start at approximately 2.25% annually for funds with assets under ₹500 crores and decrease as the fund size increases. This model ensures cost efficiency as funds scale, providing investors with a more predictable and fair expense structure compared to PMS, where fees can be tied to individual portfolio gains and other charges.

Beyond their cost and diversification benefits, SIFs also introduce the possibility of thematic and sector-specific investment strategies. Imagine an SIF focused solely on renewable energy, capitalising on India’s green energy transition. A fund manager could design a strategy to target high-growth companies in this space, creating a well-defined investment thesis with a more concentrated portfolio than traditional mutual funds typically allow. This thematic flexibility opens the door to highly specialised strategies that cater to investors with specific interests or market convictions.

However, while SIFs present a compelling investment opportunity, they are not without risks. Their success depends largely on the expertise of fund managers, as advanced strategies require skilful execution. A misstep in asset allocation or market timing could lead to significant losses, given the concentrated nature of SIF investments. Additionally, because SIFs involve a higher degree of active management, operational costs can be elevated, potentially eating into investor returns, particularly in volatile markets.

Another challenge is accessibility. Although the ₹10-lakh minimum investment threshold is significantly lower than PMS requirements, it remains out of reach for most retail investors. This means that while SIFs expand opportunities for affluent investors looking for a middle ground between mutual funds and PMS, they do not yet cater to the broader retail market. However, as the market matures, SEBI could potentially introduce similar options with lower minimum thresholds, making advanced strategies available to a wider audience.

The introduction of SIFs is a milestone in India’s financial evolution, bringing the country’s investment landscape closer to global standards. Similar investment vehicles exist worldwide, providing sophisticated strategies to investors without the complexities of hedge funds or alternative investment products. SEBI’s move ensures that Indian investors can access these opportunities within a well-regulated and transparent framework. Moreover, SIFs provide an alternative for investors who have dabbled in derivatives seeking higher returns but may not have fully understood the risks involved. While the current framework does not allow SIFs to invest in derivatives, future amendments could introduce such capabilities, offering an even broader spectrum of advanced investment strategies.

A significant advantage of SIFs over PMS and AIFs is the transparency they offer. Like mutual funds, SIFs are required to disclose their holdings and investment strategies periodically, ensuring that investors are fully aware of where their money is being allocated. This is in stark contrast to PMS and AIFs, where investments are often opaque unless investors specifically request detailed reports. The transparency of SIFs enhances investor trust and aligns with global best practices in asset management.

SIFs also have the potential to drive investments in critical sectors such as infrastructure and ESG (Environmental, Social, and Governance) initiatives. Thematic funds focusing on green energy, sustainable infrastructure, or emerging technologies could not only offer attractive returns but also contribute to national development goals. By channeling capital into these areas, SIFs could play a pivotal role in shaping the future of India’s economy while generating wealth for investors.

The launch of SIFs by SEBI is more than just the introduction of another investment product—it is a step toward a more sophisticated and inclusive financial ecosystem. By bridging the gap between mutual funds and PMS, SIFs offer a structured yet flexible approach to advanced investing. While challenges remain, their potential to democratise access to high-level investment strategies makes them a significant addition to India’s growing financial marketplace.