SEBI Introduces Special Investment Funds for High-Net-Worth Individuals, Starting at ₹10 Lakh from April 1

The Securities and Exchange Board of India (SEBI) has introduced a new investment category called the 'Specialised Investment Fund' (SIF), targeting high-net-worth investors. Effective from April 1, this initiative requires a minimum investment of ₹10 lakh. The objective is to accommodate investors with a higher risk tolerance while enabling asset managers with over three years of operational experience to implement diverse investment strategies under this framework. SIFs are positioned between traditional portfolio management services and mutual funds, offering a structured yet flexible investment approach.

Eligibility Criteria for SIFs

To qualify for establishing an SIF, mutual funds must demonstrate a minimum three-year track record and maintain an average asset under management (AUM) of at least ₹10,000 crore over the past three years. This requirement ensures that only well-established asset management firms with proven expertise can offer these funds, thereby reducing risks for investors.

Additionally, SEBI stipulates that neither the sponsor nor the asset management company (AMC) should have faced regulatory action under relevant SEBI Act sections in the preceding three years. Alternatively, an AMC may appoint a Chief Investment Officer (CIO) with at least a decade of fund management experience, overseeing an average AUM of ₹5,000 crore or more. A secondary fund manager with a minimum of three years of experience handling an AUM of ₹500 crore is also required. These stringent requirements aim to ensure that only experienced professionals manage SIFs, thereby enhancing investor confidence.

Investment Strategies in SIFs

SIFs encompass three key investment strategies: equity-oriented, debt-oriented, and hybrid strategies.

Equity-oriented strategies include the Equity Long-Short Fund, requiring at least 80% investment in equity and related instruments, with a 25% cap on short exposure through unhedged derivatives. Other variants in this category include the Equity Ex-Top 100 Long-Short Fund and the Sector Rotation Long-Short Fund, which focus on stocks beyond the top 100 and sector-specific investments, respectively. These funds allow investors to benefit from market movements while managing risk through short positions.

Debt-oriented strategies consist of the Debt Long-Short Fund, which invests across various debt instruments while permitting short exposure through exchange-traded debt derivatives. The Sectoral Debt Long-Short Fund allocates investments across at least two sectors, with a single sector investment capped at 75%. Both funds allow a maximum short exposure of 25% through unhedged derivative positions. These strategies provide an opportunity to earn returns from debt markets while incorporating hedging techniques to mitigate risks.

Hybrid investment strategies include the Active Asset Allocator Long-Short Fund and the Hybrid Long-Short Fund. The former allows dynamic allocation across asset classes while capping short exposure at 25% for unhedged positions. The latter mandates a minimum 25% allocation to both equity and debt instruments, adhering to the same short exposure restrictions. These funds offer flexibility in asset allocation, making them suitable for investors seeking diversification.

Implementation and Future Outlook

The Association of Mutual Funds in India (AMFI) will issue the necessary guidelines by March 31, 2025, to facilitate SIF implementation. SEBI has also instructed stock exchanges, clearing corporations, and depositories to establish the required systems for this category. This move represents a significant step in expanding investment opportunities for affluent investors while ensuring stringent regulatory compliance for participating mutual funds.

The introduction of SIFs is expected to have a considerable impact on India’s investment landscape, offering sophisticated investors more avenues to explore complex investment strategies. Unlike traditional mutual funds, which are heavily regulated and standardized, SIFs provide fund managers with greater flexibility in structuring their portfolios. This allows for more dynamic responses to market fluctuations, enabling better risk-adjusted returns.

Furthermore, the inclusion of long-short strategies within these funds introduces a new dimension to India’s mutual fund industry. These strategies, which involve taking both long and short positions, allow fund managers to capitalize on both rising and falling markets, potentially enhancing overall returns. The ability to engage in sectoral rotations and debt-hedging strategies further adds to the appeal of SIFs for investors with a high-risk appetite.

As SEBI continues to refine regulations and guidelines for this investment category, it is likely that more asset management companies will seek to launch SIFs, catering to a growing class of sophisticated investors. With robust regulatory oversight and a well-defined framework, SIFs could emerge as a significant player in India's investment ecosystem, bridging the gap between portfolio management services and mutual funds while offering new wealth-generation opportunities.