Why SIF launch can be UPI moment for mutual fund industry

Economic Times

04-05-2025

Enter Specialised Investment Funds (SIFs).
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Two young fish are swimming when an older fish swims by and asks, 'How's the water?' They respond, 'What is water?'We've been in these waters—the markets—for so long that we instinctively associate returns with markets going up. For us, the equivalent of "What is water?" is a falling market—something we rarely consider as a source of returns.The investing world is full of experts with bullish or bearish views on every asset class. But have you ever wondered if one could have a hare(ish) view? Hares are agile, alert, and often cautious—or shall we say, circumspect. In contrast, most mutual fund products are built around a long-term view. As a result, mutual fund investors are usually forced to think only in terms of being bullish or less bullish, with no viable way to express or benefit from a bearish view.Fund managers face the same limitation. They may adjust portfolio weights—going overweight or underweight based on their views—but they can't actively bet against the market to benefit from it.These newly introduced vehicles offer a groundbreaking opportunity for both fund managers and investors to express and potentially benefit from bearish or market-neutral views. Until now, mutual fund strategies were like cars with only forward gears—some higher, some lower—but no reverse. SIFs have just added that much-needed reverse gear. With SEBI's recent approval, SIFs can now go long or short, depending on the market view.This is a watershed moment for the mutual fund industry, which until now has offered only bull-tilted products—those that favor rising markets.SIFs also have the potential to attract PMS and AIF investors due to lower ticket sizes and mutual fund-style taxation. They could help consolidate flows that currently leak into unorganised or unregulated 'advisory' channels. The product structure is similar to mutual funds, with a cumulative entry threshold of Rs 10 lakh per investor across SIFs from the same asset manager.With the mutual fund industry currently managing around Rs 68 lakh crore (as per industry sources), nearly all of which is tilted long, SIFs—with their ability to be long, short, or even neutral—could catalyze significant expansion. This might just be the UPI moment for mutual funds.SIFs also enable the creation of products that are aggressive in either direction or even market-neutral. Debt funds, for instance, could increase duration or even run negative duration in a rising rate environment. This allows investors to hedge or profit in adverse cycles.Further, these funds could offer multiple investment windows—daily, monthly, or at fixed intervals—opening up access to higher-yielding or slightly illiquid opportunities, especially when the product tenure increases. The flexibility in strategy and payoff combinations is vast.One of the biggest advantages of SIFs is their tax treatment—identical to mutual funds. Gains are taxed based on the holding period (short-term or long-term), while underlying portfolio churn does not trigger taxation for the investor.It wouldn't be an exaggeration to say the sky is the limit for SIFs. The current framework could just be the beginning. The original consultation paper included some exciting proposals—like inverse ETFs—hinting at a far more dynamic future.For now, the car has a reverse gear. The road ahead is open.Keep SIFing!