The Rise of Specialized Investment Funds (SIFs): Bridging the Gap Between MFs and PMS/AIFs in India

The Indian investment management landscape has undergone significant evolution, marked by a sophisticated stratification of products designed to meet diverse investor needs. At one end of the spectrum lie Mutual Funds, characterized by stringent regulatory oversight, high levels of transparency, low entry barriers, and a primary focus on retail participation. At the other end are Portfolio Management Services (“PMS”) and Alternative Investment Funds (“AIFs”), which offer greater portfolio flexibility, and access to complex instruments.

In a February 2025 circular, SEBI explicitly notes that “a gap has emerged between MFs and PMS in terms of portfolio flexibility”. This gap represents a crucial mismatch between the available products and the needs of an increasingly sophisticated and affluent investor class. Thus, the introduction of Specialized Investment Funds is the latest and most nuanced application of this philosophy, meticulously designed to occupy the space between these established categories.

Defining the Specialized Investment Fund

A Specialized Investment Fund (“SIF”) is a new category of investment scheme established through the Securities and Exchange Board of India (Mutual Funds) (Third Amendment) Regulations, 2024. The comprehensive regulatory framework for SIFs came into force on April 01, 2025.

SIFs are structured legally as schemes of a mutual fund. By being housed within the mutual fund regulations, SIFs inherit the structural benefits of a pooled investment vehicle, including operational efficiencies and, most importantly, the favorable tax treatment afforded to mutual funds under Section 10(23D) of the Income Tax Act.

Core Objectives

1. To Enhance Portfolio Flexibility: The primary objective is to provide more flexible investment opportunities to a segment of investors capable of understanding and bearing higher risk.
2. To Provide a Regulated and Accessible Alternative: A secondary but equally important goal is to offer these sophisticated strategies within a regulated, transparent, and pooled framework. While PMS and AIFs offer flexibility, SIFs aim to provide a superior investor experience through the robust governance and disclosure norms of the mutual fund ecosystem, but at a more accessible entry point of INR 10 lakh.

The Regulatory and Establishment Framework

Eligibility Criteria for Asset Management Companies (AMCs)

The framework provides two distinct pathways for an Asset Management Company (AMC) to receive approval for establishing an SIF. This dual-route system is designed to ensure that participating firms possess either a proven track record of scale and stability or specialized, high-caliber talent in fund management.

Route 1: The “Sound Track Record” Route: This pathway is designed for established, large-scale players in the mutual fund industry. To qualify, an AMC must meet the following criteria: Operational History: The mutual fund must have been in operation for a minimum period of 3 years. Scale of Management: It must have an average Assets Under Management (“AUM”) of not less than INR 10,000 crore in the immediately preceding 3 years. Regulatory Compliance: No adverse action must have been initiated or taken against the sponsor or the AMC during the last 3 years.

Route 2: The Alternate Route: This second pathway creates an opportunity for newer, boutique, or specialized AMCs to enter the SIF market, provided they can demonstrate expertise by onboarding top-tier investment talent. The AMC must appoint:

1. A Chief Investment Officer specifically for the SIF, who possesses a minimum of 10 years of fund management experience and has managed an average AUM of not less than INR 5,000 crore.
2. An additional Fund Manager for the SIF, with at least 3 years of fund management experience and a track record of managing an average AUM of not less than INR 500 crores.
3. Regulatory Compliance: As with Route 1, the sponsor and AMC must have a clean regulatory record for the preceding 3 years.

This dual-route eligibility structure is a sophisticated piece of regulatory design. It avoids concentrating the SIF market among only the largest incumbents. Route 2 acknowledges a critical market reality: expertise in complex alternative strategies is often concentrated in highly skilled individuals rather than large institutions.

Investor Profile

The cornerstone of the SIF framework is the meticulous definition and enforcement of investor eligibility, ensuring that these products are restricted to those who can adequately assess and absorb the associated risks.

1. Minimum Investment Threshold: The primary gatekeeping mechanism is a minimum investment requirement of INR 10 lakh. This threshold is applied at the investor’s Permanent Account Number (PAN) level and represents the aggregate investment across all investment strategies offered by a single SIF.
2. Exemption for Accredited Investors: Recognizing their inherent sophistication and financial standing, the framework exempts individuals or entities who meet SEBI’s definition of an “Accredited Investor” from the INR 10 lakh minimum investment requirement.
3. Systematic Investment Facilities: AMCs are permitted to offer systematic options such as the Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP). However, the AMC must have systems in place to ensure that the investor’s total SIF holding remains compliant with the INR 10 lakh threshold at all times.
4. Breach Protocols and Monitoring: SEBI has mandated a robust and stringent mechanism for the daily monitoring of the investment threshold, with specific protocols for handling breaches.

SIF Strategies and Restrictions

1. Permitted Investment Strategies: The SEBI circular outlines a defined list of seven investment strategies across three broad categories that are permitted to be launched. A critical overarching rule is that an AMC is permitted to launch only one investment strategy under each category. Readers can access the comprehensive list here.
2. The Role of Derivatives – The Core Differentiator: The defining feature that separates SIFs from conventional mutual funds is the explicit permission to use derivatives for sophisticated strategies beyond simple hedging.
3. Unhedged Short Exposure: The framework allows SIFs to take unhedged short positions through permissible exchange-traded derivative instruments up to a maximum of 25% of the net assets of the investment strategy.
4. Gross Exposure Limit: To prevent excessive leverage, the framework imposes a strict cap on overall risk. The cumulative gross exposure of a strategy calculated as the sum of exposures through the cash market (equity, debt) and the derivatives market must not exceed 100% of the net assets of the strategy at any point in time.

Prudential Investment Norms and Restrictions

1. Debt & Money Market Securities (Issuer Limits): To prevent overexposure to a single borrower, an SIF investment strategy shall not invest more than: 20% of its NAV in debt and money market securities issued by a single issuer and rated AAA. 16% of its NAV in securities from a single issuer rated AA. 12% of its NAV in securities from a single issuer rated A and below.These single-issuer limits may be extended by an additional 5% of the NAV with prior approval from the Board of Trustees and the Board of the AMC.
2. Debt & Money Market Securities (Sector Limits): An SIF investment strategy is prohibited from investing more than 25% of its NAV in the debt and money market securities of a single sector.
3. Other Applicable Restrictions: SIFs must also adhere to other investment restrictions applicable to mutual fund schemes, which include:

• Single Company Equity Limit: No strategy can allocate more than 10% of its NAV to the equity shares and equity-related instruments of a single company.
• REITs and InvITs Limit: Investment in units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is capped at 20% of NAV in total, and no more than 10% of NAV in units issued by a single REIT or InvIT issuer.
• Mandatory Listing Requirements: To provide a viable exit mechanism for investors in funds with restricted redemption windows, the framework mandates that the units of all close-ended and interval investment strategies must be listed on one or more recognized stock exchanges.
• Mandatory Certification: While entities already engaged in the distribution of mutual fund products are eligible to offer SIFs, there is a crucial additional requirement. The individuals involved in the sale and distribution of SIFs must have passed the National Institute of Securities Markets (NISM) Series-XIII: Common Derivatives Certification Examination.

Conclusion

Specialized Investment Funds are more than just a new product category; they are a structural enhancement to the Indian capital markets. They represent a sophisticated, well-calibrated response to the evolving needs of investors and the growing capabilities of the asset management industry. While challenges to their adoption exist as they are still in nascent stage, their thoughtful design and robust regulatory underpinnings position them to become an integral and enduring feature of India’s investment landscape.