Investors should consult their financial advisors about suitability and the allocation in their portfolios, before investing in SIF
Investors have accepted mutual funds as a preferred wealth building tool in India. Specialised Investment Funds (SIF) have also emerged as a preferred means to invest in mutual funds.
Mutual funds offer exposure to various asset classes, and they can be used to achieve specific financial goals. Investors can pick specific schemes by referring to their investment mandates and asset allocation. However, to offer specialised investment strategies and to plug the gap between mutual funds on the one hand, and portfolio management schemes (PMS) and
Alternative Investment Funds (AIF), on the other hand, the financial market regulator has introduced the specialised investment funds (SIF).
Knowing more about SIF can help investors to put these new investment vehicles to their advantage. Here is the low-down:
Though SIF is a pooled investment vehicle, it differs from mutual funds in many aspects.
To begin with, the SIF can short sell a security, up to 25% of its assets. Short selling a security means selling a security without owning it with a view to buy it back later. This works best when the stock (or any security) prices are falling. A short-seller can make money in a falling market as well. Mutual funds cannot short-sell.
There are three broad strategies of SIFs – equity, debt and hybrid; and all put together, there are seven categories of SIF. Among equity SIFs, there are three different variants available.
Equity long-short fund offers a flexi-cap equity portfolio. Equity Ex-top 100 long-short fund invests a minimum 65% of the money in equity and equity-related instruments of companies, excluding the top 100 companies by market capitalisation. Put simply, this offers mid-small cap equity exposure. The third equity variant is the Sector rotation long-short fund. This mandates a minimum 80% equity exposure to a maximum of four sectors. These three put together cover a diversified equity landscape in India – flexi-cap, mid-small cap and sectoral opportunities.
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Among hybrid offerings, the active asset allocator long-short fund lets the fund manager invest in a mix of stocks, bonds, equity derivatives, real estate investment trusts, infrastructure investment trusts, and commodity derivatives. The fund manager is given a free hand. The hybrid long-short fund, the second hybrid SIF offering, requires allocating at least 25% each to shares and bonds, in addition to other investments.
In debt-oriented SIF offerings, investors have the option between a debt long-short fund and a sectoral debt long-short fund. While the former lets the fund manager pick bonds across the spectrum, the latter mandates investing in bond instruments issued by entities in a minimum of two sectors, with a single sector cap of 75%
As all categories discussed above allow short selling securities to the extent of 25% of the scheme assets, the schemes are expected to make money in weak markets, or at least contain the downside. Investors can expect relatively less volatility from SIF, compared to mutual funds, as the fund managers are empowered to short-sell.
This also means that if the fund manager’s call goes wrong, then it can back-fire as well. Also, in a raging bull market, a long-short strategy may not generate top-of-the-table returns. For risk-optimised outcomes, an investor should ideally invest in an SIF with a minimum five years view. Since this is a new category of pooled products, the first-time investors in equity markets should ideally go slow. Minimum investment in SIF is mandated at Rs 10 lakh Investors can also add to their existing commitments through systematic investment plans, which should work for continuous contribution to the wealth creation process.
Mutual fund houses have extended a warm welcome to the SIF. Here are a few SIF already opened for continuous subscription:
More SIF are expected to hit the market in the new year.
Bandhan mutual fund-backed Arudha SIF, Endurance SIF backed by DSP Mutual Fund, ISIF backed by ICICI Prudential Mutual Fund and Platinum SIF promoted by Mirae Asset Mutual Fund are expected to launch their offerings soon.
But investors should consult their financial advisors about suitability and the allocation in their portfolios, before investing in SIF.
Disclaimer: Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.