Specialised investment funds: What investors should know before investing

Specialised Investment Funds (SIFs) are gaining traction in India, with assets under management reaching Rs 38,287 crore in September 2026, according to a report. Designed to bridge conventional mutual funds and more sophisticated investment strategies, SIFs require a minimum investment of Rs 10 lakh under the applicable framework.

Speaking to The Federal, Bhautik Ambani, CEO of AlphaGrep Mutual Fund, discusses whether SIFs are an alternative to conventional mutual funds, how long-short strategies and derivatives affect returns, and what investors should assess before investing.

Edited excerpts:

What are SIFs, and how do they differ from conventional mutual funds?

An SIF, by contrast to an Alternative Investment Fund (AIF), is capped at 25 per cent. So, I think of SIFs as occupying a space between what a mutual fund can do and what a typical hedge fund can do. They are not a replacement for a hedge fund today.

Another major difference compared with mutual funds is that SIFs are permitted to take naked short positions of up to 25 per cent. In my view, whether someone wants to pursue long-short strategies or take advantage of naked shorting, the ability, skill set and experience required to deal with derivatives are extremely important.

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This means that someone who can combine the skills required to manage a traditional mutual fund with the ability to deal with derivatives would have a great combination of skills for developing a good SIF strategy.

SIFs require a minimum investment of Rs 10 lakh. Which investors should consider them?

Given the minimum investment requirement of Rs 10 lakh, only certain segments of investors can participate in SIFs, broadly classified as mass-affluent investors, high-net-worth individuals (HNIs), ultra-high-net-worth individuals (UHNIs), and potentially institutions and family offices.

Depending on the strategy, SIFs may serve as alternatives to fixed-income products, arbitrage strategies, hybrid funds, balanced advantage funds or equity investments within a portfolio.

How do SIFs compare with mutual funds, portfolio management services and alternative investment funds in terms of cost, taxation, transparency and investor protection?

The most important thing to understand is that an SIF operates within a mutual fund platform. The biggest advantage, or the source of comfort for investors, is the governance structure of mutual funds.

Across the different categories of licences provided by SEBI, mutual funds have one of the most regulated and closely supervised frameworks. In that sense, the regulatory structure offers investors considerable comfort.

From a governance perspective, I don't think any other platform comes close to mutual funds. An SIF is part of a mutual fund house, and I believe that is the most reassuring factor for investors when comparing it with a portfolio management service (PMS) or an AIF.

SIF assets have grown nearly 19 times in less than a year. What is driving this growth? Does it reflect genuine investor demand or the launch of new products?

I think it is a combination of factors. SIFs can offer something new and different. On paper, an SIF's additional toolkit provides several possibilities for investors.

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If the fund intends to deploy derivatives, investors should examine the fund manager's experience, skill set and track record in managing derivative strategies. The skill set required to deal with derivatives is very different from that needed for cash equities, long-only investing or a buy-and-hold approach. It is a very different ballgame, and investors should evaluate fund managers accordingly.

Second, investors should examine the net exposure of a particular strategy. This helps them understand where the strategy fits into a client's overall portfolio.

Third, investors should ask fund managers what kinds of derivative strategies they are running.

Hybrid strategies account for nearly 69 per cent of SIF assets. How do these strategies work, and what risks should investors understand before investing?

From a risk perspective, investors should expect arbitrage-plus risk.

What we generally tell investors is that if they intend to invest in a strategy for more than a year and are looking for better returns than arbitrage, they could examine this kind of product.

SIFs also offer relatively decent liquidity. It is difficult to find all these features combined in many other products, and I am not aware of another product that offers all of them together in the same way.

If this combination of features matters to an investor, and they have capital allocated to arbitrage funds, equity savings, certain debt instruments or relatively lower-risk hybrid instruments, they could consider whether some hybrid SIFs offer a better proposition in terms of returns and risk-adjusted returns.

However, it is very important to understand that not all hybrid SIFs are positioned in the same way. Some hybrid SIFs may operate with net exposure or net delta of around 10–20 per cent. Others could have net equity exposure of 30–50 per cent. These funds would behave differently under different market conditions.

SIFs offer greater investment flexibility, including strategies that can take short positions. How can these strategies affect returns during volatile or falling markets? How much loss could investors face?

When someone invests in the market, they are largely exposed to two kinds of risk: market risk and stock-specific risk. In technical terms, these are called systematic risk and idiosyncratic risk, respectively.

We hedge a large part of the systematic or market risk because we have approximately equal amounts in long and short positions.

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If the market were to rise or fall by 5 per cent, that would largely not affect the strategy in a major way. Instead, we are relying on our ability to take long or short positions in the right stocks and actively manage the portfolio.

Before investing, what should investors check about a fund manager's past performance, fees, liquidity and exit restrictions? How should they decide between an SIF and a conventional mutual fund?

If I were an investor considering an SIF for the first time, I would spend most of my time understanding the pedigree, skill set, track record and experience of the fund manager or the team managing the SIF in the derivatives space, if the strategy claims to use derivatives.

Once I am comfortable with the team's expertise, I would examine other factors, such as the strategies in which the fund is positioned, its net exposure and the derivative strategies it deploys. I would also assess whether those strategies are high-risk or low-risk.

I would treat these as the second and third levels of evaluation. The priority would be to understand the team's experience with derivatives.

(The content above is for information only, and does not constitute investment advice.)