New Asset Class Thro’ Specialised Investment Fund On The Horizon

Categorisation of the strategies includes long-short funds i.e., equity long-short, debt long-short, etc. In both the equity and debt options, another common strategy is thorough sectoral long-short. And distinctively for equity-oriented investments a category of equity ex-top 100 long-short fund and hybrid asset allocator long-short fund options are allowed, for now

The Securities Exchange Board of India (SEBI) has issued a circular to clear the launch of a new asset class through the Specialised Investment Fund, SIF. This circular comes into force from the beginning of the next financial year, 1st April 2025 onwards while the AMFI (Association of Mutual Funds in India) shall come up with necessary guidelines/standards by 31st March 2025. The current range of investments begins with Mutual Funds (MF), migrating to Portfolio Management Services (PMS), and to Alternate Investment Funds (AIF).

While the recent proposal is to reduce the minimum MF threshold to Rs250 from the current Rs500 monthly, the next set of opportunities begins at Rs50Lakh for PMS and Rs1Cr for AIF options. This has resulted in a huge gap between the MF and PMS avenues; the current regulation is an attempt to fill this. The minimum investment in these funds begins at Rs10L for the investors.

Per the regulation, SIF could be provided by only the Asset Management Companies (AMC) with those meeting the eligibility criteria including a minimum of 3 years in operations with at least Rs10K Cr in Assets Under Management (AUM) with no action taken against the sponsor/AMC under Sec 11A, 11B, and/or section 24 of the SEBI Act in the last three years. Or the AMC could appoint a Chief Investment Officer (CIO) for the AIF with experience in fund management of at least 10 years and has managed an average AUM of Rs5000 Cr and an additional fund manager for the SIF with experience in fund management of at least 3 years who had managed a fund with an AUM of not less than Rs500 Cr during the last three years.

The communication of SIF should be distinct from the MF offering of the AMC with a logo, brand, and a separate website. The regulator also has come up with the permitted investment strategies to be launched under the SIF. Broadly, SEBI has classified three investment strategies based on the asset class, viz., equity-oriented, debt-oriented, and hybrid.

In all three the categorisation of the strategies includes long-short funds i.e., equity long-short, debt long-short, etc. In both the equity and debt options, another common strategy is thorough sectoral long-short. And distinctively for equity-oriented investments a category of equity ex-top 100 long-short fund and hybrid asset allocator long-short fund options are allowed, for now.

SIF may be offered in a close-ended, open-ended, and/or interval with subscription and redemption frequency appropriately disclosed. The minimum redemption frequency for any of the equity strategies is daily or less while for the debt strategies, it's once a week or less, and for the hybrid, it's two times a week or less. Unlike the MF, to avoid any proliferation of SIF offerings, only one product from each of the categories is allowed for each AMC. Also, the minimum investment threshold shouldn't fall below the norm due to redemptions by the investor. Of course, the valuation of the investment could go below the threshold due to the NAV (Net Asset Value).

The most important part of SIF is to allow the use of derivative strategies allowing them to take exposure up to 25 per cent of the net assets in permissible exchange-traded derivative instruments specifically for purposes other than hedging and portfolio rebalancing. This means the SIF could take an unhedged short exposure through 25 per cent of the net assets in addition to the derivative positions for hedging and rebalancing purposes. This puts these products at a higher risk than most PMS products which predominantly trade in the cash segment.

SIF shall invest not more than 20 per cent of its NAV in debt and money market securities issued by a single issuer of AAA rating 16 per cent of AA rated issuer or 12 per cent of A or below-rated issuer. These, however, could be extended by 5 per cent upon prior approval by the trustees of MF and the board of the AMC. SIF shall not invest more than 25 per cent of its NAV in debt and money market securities of a particular sector. They can't own more than 15 per cent of any company's paid-up capital carrying voting rights.

That's also the rationale for the regulator to ensure stringent rules for the distribution of these products. AMFI and AMC shall ensure compliance for allowing those individuals, firms, and entities that have passed the National Institute of Securities Markets (NISM) Series XIII: Common Derivatives Certification Examination. SEBI also proposed that like MF, a five-level risk band be published for each of the strategies with Risk band level 1 to lowest risk increasing to highest risk for Risk band level 5.

Ushering more transparency, the SIF shall disclose its portfolio including the derivatives on the last day of every alternate month for all its investment strategies on the website in a user-friendly format. Moreover, the Investment Strategy Information Document (ISID) shall include a scenario analysis, depicting the expected loss to the investor due to the market fluctuations in a format prescribed by AMFI consultation with SEBI on or before 31st March 2025.

(The author is a partner at "Wealocity Analytics", a SEBI-registered Research Analyst firm, and could be reached at [email protected])