The Securities and Exchange Board of India (SEBI) has finally bridged the gap between mutual funds and PMS with a new product category- Specialized Investment Fund (SIF). It is expected to be launched by the mutual fund companies in the market by April-May 2025.
The launch of SIF finally answers the question investors have often asked us: Is there any other product like Portfolio Management Service with a lower investment threshold?
Well, there is now.
This is good news for all the investors who can invest aggressively and take more risks to generate superior rewards.
Let’s understand this new product category in detail…
Mutual funds and PMS are two of the most popular equity investment avenues. While mutual funds are for everyone, PMS is only ideal for HNIs due to its high minimum investment value.
1. Mutual funds are suitable for a broad range of investors. Anyone can invest in different categories of mutual funds as per their risk appetite and financial goals. Mutual funds have low minimum investment requirements. One can start an SIP of even INR. 100 per month.
2. Fund houses follow a pre-defined strategy for mutual funds based on the category. Mutual funds offer instant diversification, however, with limited flexibility. Plus, you cannot customize it as per your preferences. For that, you will have to create a portfolio of multiple mutual funds to balance risk-reward and optimize returns. This option also has limitations in terms of customizations.
3. While mutual funds have certain categories suitable for aggressive investors, the regulations make them rather conservative for truly aggressive investors. For instance, mutual funds have to follow regulations on the allocation concentration of underlying assets, making them safer than PMS.
1. PMS is a combination of stocks, bonds, mutual funds, and other securities. It offers the customizations that mutual funds lack. This product is ideal for investors who want to build investment strategies tailored to their financial goals.
2. PMS has a minimum investment requirement of INR 50. Lakhs, making it accessible only to HNIs and institutional investors. You have to create a separate demat account which will be handled by the fund manager. Once you choose the PMS strategy, the stocks selected by the fund managers will get added to your newly created demat account.
3. You will have the flexibility to exclude certain stocks in case you already have ESOPs of that company, or you follow Sharia law, or you are a board member of the company with restrictions on trading dates. All these specifications can be incorporated with PMS.
4. PMS doesn’t have any restriction on the allocation concentration of the underlying assets. The concentration of the underlying assets depends on the fund manager’s strategy, factoring in the investor’s risk appetite and goals.
5. PMS attracts higher costs compared to mutual funds. Fund managers charge fixed, variable, or performance-based fees to manage your portfolio.
As you can see, between mutual funds and PMS, the gap between features and minimum investment value is rather huge.
Savvy investors have been waiting for a product like SIF for a long time. In fact, we have met a lot of investors who are ready to graduate from mutual funds but can’t get into PMS due to the value threshold. SIF would be perfect for them.
SEBI has launched SIF for informed investors who have already spent years with mutual funds and are willing to take higher risks.
SIF offers more flexibility to fund managers compared to mutual funds. However, the degree of flexibility will be lower than PMS as SEBI has imposed certain restrictions on the framework. These investor-friendly regulations will ensure that fund strategies are not too aggressive.
The minimum investment requirement for this product is INR. 10 lakhs.
The underlying assets in this category are: Equity, debt, real estate, and more.
Equity Instruments:
1. SIFs can own up to 15% of the company’s shares that have voting rights. This is better than mutual funds where the threshold is 10%.
2. The limit on investing in shares of a single company is 10% of the total NAV.
Debt Instruments:
1. A fund can only put up to 20% of the money into company’s bonds (debt) to lower the risk.
2. In special cases, the limit can be increased to 25% with the approval from the trustees and board.
3. Government securities and treasury bills are exceptions to this rule as they are safe investment avenues.
REITs and InvITs:
1. SIFs can invest up to 20% of the money into real estate trusts (REITs) or infrastructure funds (InvITs).
2. However, they cannot invest more than 10% in one trust to ensure diversification.
Derivatives:
1. The investment strategies for SIF may invest in derivatives for market exposure.
2. The cumulative gross exposure across investable instruments and derivates should not exceed 100% of the fund’s value.
3. A maximum of 50% of the fund can be in derivative trades from the stock exchange.
4. Derivates exposure is capped at 10% of the fund for any single stock.
5. The total exposure should be the sum of exposure to instruments in both the cash market and the derivatives market.
1. Unique Investment Opportunities: With SIF, you get exposure to specialized investment strategies and asset classes that mutual funds may not offer.
2. Superior Returns: SIF has the potential to deliver superior returns compared to traditional investment avenues due to its focused strategy and higher risk profile.
3. Diversification: SIF will increase the degree of diversification in your portfolio by offering exposure to non-correlated asset classes.
The taxation on SIF will be the same as equity mutual funds.
Long-term Capital Gain Tax: 12.5% if you withdraw investments after 12 months.
Short-term capital Gain Tax: 20% for investments redeemed before 12 months.
1. Higher Risk: SIFs are riskier than mutual funds and traditional instruments due to exposure to specific sectors and strategies.
2. Limited Liquidity: As SIFs invest in private equity and real estate, the liquidity might be lower. These instruments are not as liquid in nature as other instruments.
3. Fees: SIFs may charge higher fees than mutual funds due to their focused approach and management.
The launch of SIF marks a significant improvement in investment options for savvy investors. A product that intersects mutual funds and PMS was a long time coming.
Now, investors have the option to further diversify their portfolio with customized and flexible investment products.
With a minimum investment of INR. 10 lakhs, SIF is accessible to experienced investors. As SIFs carry higher risk, limited liquidity, and higher fees, they are only suitable for informed investors with a high-risk appetite.
As always, consider your financial objectives, risk appetite, and investment horizon before you explore this new category.
Take our risk profiling quiz to understand your risk appetite.
