As Specialized Investment Funds (SIFs) begin to take shape in India’s investment landscape, fund houses are positioning them as a bridge between traditional mutual funds and more sophisticated investment vehicles such as Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).
In this interaction with Cafemutual, Kalpesh Jain of Kotak Mutual Fund shares his views on the role SIFs can play, why taxation could become a major differentiator, the rationale behind Kotak’s hybrid SIF offering and what mutual fund distributors should keep in mind while evaluating these products.
SIFs are being positioned as a bridge between mutual funds and PMS/AIFs. How do you see this new category fitting into India’s investment landscape? What investor gap do you believe SIFs are addressing that existing mutual fund offerings cannot?
SIFs currently come with a minimum investment threshold of Rs. 10 lakh. In practical terms, that would mean an investor may need a portfolio of around Rs. 50 lakh to meaningfully allocate to this category, which remains a sizeable requirement in the context of the Indian market.
However, I believe SEBI is taking a cautious approach. The regulator would first like to assess investor response before making any significant changes. If SIFs are successful in managing volatility through prudent use of derivatives, there is a possibility that the minimum ticket size could be revisited in the future.
One of the key reasons behind the introduction of SIFs is SEBI’s concern over losses suffered by retail investors in the futures and options (F&O) segment. According to SEBI, retail investors have collectively lost around Rs. 1.25 lakh crore in F&O trading in the previous financial year only. SIFs provide access to derivative-based strategies within a mutual fund-like structure and tax framework.
Importantly, derivatives in SIFs are intended to reduce risk and volatility rather than increase them, as leverage is not permitted in this asset class. This could potentially improve risk-adjusted returns for SIFs.
Unlike traditional mutual funds, which largely depend on rising markets to generate returns, SIFs can pursue strategies that do not rely solely on long-only market exposure.
Do you think SIFs will create a new investor segment, or will they largely attract assets from PMS, AIFs and traditional mutual funds?
Investors have to pay higher tax that can go up to 42.5% in Cat III AIFs, which is closest comparable of SIFs.
But, if an AIF is delivering returns closer to 12-13%, there could be a meaningful migration towards SIFs because of the tax advantage.
Similarly, PMS investors are taxed at the individual level. Portfolio churn can create taxable events, reducing the benefits of long-term compounding. In contrast, SIFs offer a structure where portfolio-level churn does not directly impact investor taxation.
Because of these advantages, I believe SIFs have the potential to surpass PMS and AIFs and emerge as the second-largest investment category after mutual funds.
Kotak has recently launched a hybrid SIF fund, what is the rationale to go with hybrid instead of equity and debt strategy?
Market conditions played an important role in that decision. Indian equity markets have remained broadly range-bound over the past two years, leading us to believe that a hybrid SIF strategy is well suited to the current environment.
Hybrid SIFs are designed to generate absolute returns. They have the potential to perform in rising markets, flat markets and even mildly negative markets.
This flexibility makes them particularly relevant in an environment where directional market returns may be uncertain.
Investors may ask why they should consider a hybrid SIF when they already have access to a wide range of hybrid mutual funds. How would you explain the difference?
Traditional hybrid funds generally maintain a fixed allocation to equities, whether through long-only equity exposure or arbitrage strategies. On average, many hybrid mutual funds maintain around 35% net equity exposure with regulatory limitations.
While, SIFs provide significantly greater flexibility, each fund manager can design a distinct investment approach. For example, Kotak’s hybrid SIF follows an absolute return strategy that seeks to generate returns through derivatives, special situations, covered calls, arbitrage opportunities and fixed-income investments.
The focus is on limiting equity risk while targeting returns in the range of 8-12%.
There are also hybrid SIFs that maintain equity exposure of more than 65%, making them more comparable to traditional hybrid funds. Even in such cases, fund managers have the flexibility to use derivatives either to manage risk or generate additional alpha.
Beyond the current hybrid offering, what strategies within SIFs excite you the most? Do you see hybrids becoming the largest SIF category and why?
Apart from hybrid strategies, I believe equity-oriented SIFs also have strong potential.
One key differentiator is that SIF fund managers can use derivatives more effectively to manage volatility and pursue differentiated outcomes. In addition, SIFs provide greater flexibility in portfolio construction, as fund managers are not bound by some of the exposure constraints that apply to traditional mutual funds.
Given the size of India’s flexi-cap category where a few big funds have become oversized, SIF-based equity strategies could emerge as serious competitors.
Asset allocation strategies are another area of interest. These funds can dynamically manage exposure across multiple asset classes, making them well placed to generate attractive risk-adjusted returns in the current market environment.
Several AMCs are joining the SIF race, what will be the USP of Kotal Mutual Fund that will be different from other players?
The first differentiator is our fund management team. We have built a team with experience in long-short and alternative investment strategies, whereas many other industry players are relying primarily on their traditional long-only investment teams.
The second advantage is Kotak’s brand reach and distribution strength, which enables us to engage with a broader set of investors.
Finally, our conservative investment philosophy and client-first approach should help us build trust and scale in the SIF segment.
In your opinion, what are the challenges with the MFDs around SIFs? What are the things that they are underestimating while deciding whether to sell SIFs or not?
I do not believe MFDs are ignoring SIFs. The biggest challenge currently appears to be the certification requirement.
Based on available data, only around 6,000 distributors out of approximately 2.5 lakh MFDs have cleared the SIF examination, which is roughly 2.5% of the overall distributor base.
As more large AMCs launch SIF products, distributor participation is likely to increase. At Kotak Mutual Fund, we are actively conducting training programs to help MFDs become SIF-ready and the response has been encouraging.
There are also discussions around making the NISM certification process more practical and accessible, which could further improve participation.
Given the short time of their existence, how do you think the MFDs shortlist the funds? What are the things that they need to keep in mind while doing the sorting?
MFDs should avoid treating all SIFs as a single category because the underlying strategies can vary significantly.
The first step should be to understand the investment philosophy and strategy of each offering by engaging directly with fund houses. Product selection should then be aligned with the risk profile and objectives of the client.
For investors seeking minimal risk, distributors may consider SIFs focused on income and arbitrage strategies. For investors willing to take moderate risk, absolute return-oriented products may be suitable, while for the investors looking for greater participation in equity market’s upside movements, strategies with higher equity exposure can be a suitable pick.
The key is to match the strategy with the client’s expectations rather than treating all SIFs as interchangeable products.