This equity market correction leaves the traditional mutual fund investor bereft of options. The fund manager’s only choices are to buy or sell shares, stay in cash, and wait for prices to fall if they find the market overvalued. They can hedge in a limited way but not profit from a market or stock-specific fall. SEBI does not permit them to short the market. (Shorting is a system whereby you sell shares without actually holding them, hoping that the price will fall and you buy them at lower prices and thereby pocket the difference).
Last October, the then SEBI chief warned that about one crore retail investors had lost about Rs 1.18 lac crores between FY 22 and FY 24 in futures and options trading. Although about 98% of retail investors lose money in futures and options, they persist. It may be the thrill, the fun, or the hope of making money by getting the bet right.
For the well-heeled, Portfolio Management Schemes and Alternative Investment funds with a higher cutoff minimum investment of 50 lacs to one Cr can take riskier bets like shorting and options.SEBI has announced a Specialised Investment Fund, a new asset class launched after 1 April 2025, to address this gap in the offerings for smaller retail investors. The minimum investment in this product is Rs. 10 lacs.
As per Sebi’s circular, Amc’s can launch three types of Specialised Investment funds.
- Equity Specialised Investment Funds – Three schemes can be launched under this category.
- Equity Long-Short fund
- Equity Ex Top 100 Long-Short Fund
- Equity Sector Rotation fund
- Debt Specialised Investment Funds – Two Schemes can be launched under this category.
- Debt Long-Short fund
- Sectoral Debt Long- Short fund
- Hybrid Specialised Investment Funds – Two Schemes can be launched under this category.
- Active Asset allocator Long Short fund
- Hybrid Long-Short fund
A brief note on the subcategories.
Equity Long-Short Fund: The fund manager must invest at least 80% in equities and can take 25% short positions.
Equity Ex Top 100 long-short fund: The fund manager must invest at least 65% in equity in stocks that are not in the top 100 by market capitalization. 25% shorts are allowed.
Equity Sector Rotation fund: The fund manager must invest at least 80% in equity and can take concentrated exposure in a maximum of four sectors. 25% shorts allowed.
Debt long Short Fund: The fund manager can invest in debt securities (there are overall defined limits for ratings and issuers) and no restrictions on shorting limits.
Sectoral Debt Long Short Fund: The fund manager has to invest at least in Debt of two sectors with a maximum of 75% in one. Derivatives up to 25% of the holdings.
Hybrid Asset Allocator Fund: Dynamic asset allocation, Equity/Debt/REITs /Commodity Derivatives. Maximum derivative exposure 25%.
Hybrid Long–Short fund: Minimum investment in Equity/Equity instruments, Debt. Derivatives all 25%.
For detailed notes on the fund’s construct, check out the Sebi Circular or wait for the key information memorandum on launching a fund in this category after 1 April 2025.
One of the most interesting parts of the Specialised Investment Fund is the taxation of gains. These funds will be taxed similarly to mutual funds.
Equity SIFs that maintain more than 65% gross equity exposure will be subject to a 20% short-term capital gains (STCG) tax and a 12.5% long-term capital gains (LTCG) tax after a one-year holding period.
Debt SIFs, whatever the holding period, will be taxed at the investor’s slab rate.
Hybrid SIFs with less than 65% allocation to Debt will be taxed at the investor’s applicable slab rate for STCG, while LTCG will be taxed at 12.5% after a two-year holding period.
These funds may suit risk-taker investors who want to dabble in futures and options and deal in structured products. As long as the fund manager gets his strategy right, this fund can become an exciting option managed by professional investors. If the investor understands the risks his fund manager can take and is comfortable taking both the downside and the upside, these products can become super hits.
As the SIF funds launch, we can wait, watch, and study the schemes’ risk management and fund management expertise before investing. All in all, on paper, they are exciting products under Sebi’s regulatory watch.
Neeta
Very very informative. Always great reading and gaining knowledge.
Amita
Thankyou 🙂