What Are SIFs? Specialized Investment Funds Explained | mStock Podcast

Vidhi Mehta: Hello everyone and welcome to Funds ka Funda. Markets are evolving, investors are evolving, and today, even investment products are evolving. One such new category that has recently entered the Indian investment landscape is SIFs, or Specialised Investment Funds. SIFs were launched only a few months ago, but they have already started gaining attention among investors. To help us understand this space better, we have with us Gaurik Shah. Hi Gaurik, welcome to the show.

Gaurik Shah: Thank you, Vidhi. Thanks for having me here.

What Are SIFs?

Vidhi Mehta: Gaurik, everyone is talking about SIFs right now. While we were discussing earlier, we spoke about how SIFs were launched only in October and have already reached an AUM of around ₹12,500 crore. So, for an investor, can you explain in very simple terms what exactly are SIFs?

Gaurik Shah: SIFs are one of the newest innovations within the mutual fund framework. They offer certain additional flexibility compared to typical long-only mutual funds. But to understand SIFs properly, we first need to understand why SEBI introduced this category in India at this point in time. Historically, derivative strategies were not easily accessible to normal Indian investors. When derivatives were first launched by NSE in 2001, these strategies were mainly accessed by proprietary desks, hedge funds and institutional clients. Later, such strategies became available to ultra-HNI investors through AIFs. Now, for the first time, these kinds of strategies are being made available to the mass affluent segment. Having said that, SIFs are still not meant for very retail investors. One possible reason behind this development is what happened after COVID. Many investors and traders in India started trading in derivatives, and a lot of them lost money. One of the reasons was that they did not have a formal or structured way to access this market. Many investors were accessing derivative strategies through informal advisors or finfluencers, where exaggerated claims were often made. As a result, many people ended up feeling cheated. So, SEBI has tried to make such strategies available in a more formal and structured manner, possibly in a graded way. Currently, SIFs have been given some additional flexibility compared to normal mutual funds. The key change is that, for the first time, SEBI has allowed shorting within a mutual fund-like framework.

In normal mutual funds, you cannot have naked short positions. In SIFs, shorting is allowed, but within limits. It is not full shorting. The limit is 25%, so investors should not expect a full hedge kind of position. But this does give fund managers more flexibility. Some strategies that were earlier used in AIFs, hedge funds or proprietary books, and were not allowed in mutual funds, can now be used in SIFs. That is the main difference. SIFs have more flexibility compared to traditional mutual funds.

How Should Investors Evaluate SIFs?

Vidhi Mehta:Got it. Retail investors, or any investor for that matter, usually have one question at the back of their mind. They ask the fund manager or wealth manager how much return will this product give me? But investors should also understand that SIFs have been launched only recently. It has been just six to eight months. So, asking for returns or directly comparing them with mutual funds may not be the right parameter.

So, what are the parameters that an investor should evaluate while investing in an SIF? How should they decide whether an SIF fits into their portfolio or not?

Gaurik Shah: You are right. Six to eight months is a very short period to judge any product. It is too early to say whether a product is doing well or not. Also, SIFs use derivative strategies, where the risk and return behaviour can be nonlinear. Some risks may not materialise for a long period of time, but that does not mean the risks are not there. In some derivative strategies, returns may look steady for one or two years, but the risk may remain hidden and can appear during specific market conditions. So, investors need to understand the strategy that each SIF is following and the kind of risk it is taking. SEBI has categorised SIFs into different categories. But according to me, investors can broadly think of SIFs in three buckets. The first is the conservative bucket. These products may compete with categories like arbitrage funds, equity savings funds, short-duration funds and similar products. The second is the aggressive bucket. These products may target returns similar to or higher than Balanced Advantage Funds. The third is the long-only bucket. These may work more like long-only equity mutual funds. So, investors should not compare all SIFs with each other. A conservative SIF should be compared with other conservative products. It should not be compared with an aggressive SIF or a long-only mutual fund. That separation is very important. More importantly, investors need to understand what risk the SIF is taking. As I said earlier, some risks may remain hidden for a long time, but they still exist. If a fund is trying to avoid or reduce certain risks, there will be a cost attached to that. A fund that is being conservative and protective of investors may look like it is underperforming for some time, unless and until that risk materialises. So, it is not correct to simply look at returns and compare products. SIFs are more complex than traditional mutual funds.

Are There Different Time Horizons for Different SIFs?

Vidhi Mehta: Understood. Like you said, investors can broadly think of SIFs in three buckets  conservative, aggressive and long-only. Are there different time horizons that investors should keep in mind for these buckets?

Gaurik Shah: I am more of an asset allocation believer. I would say SIFs should be seen as asset allocation tools. There may be a specific part of your portfolio where you feel there is a gap, and an SIF can help fill that gap. For example, conservative SIFs should be evaluated against other conservative products. But even within that, investors need to understand how each product behaves in different market conditions. A conservative SIF may underperform an arbitrage fund when markets are falling, because arbitrage funds are relatively flat-return products. But when markets are doing well, the SIF may outperform an arbitrage fund. On the other hand, equity savings funds may have higher market participation when markets are rising. But when markets fall, they also participate on the downside. So, typically, a conservative SIF may outperform equity savings funds when markets are falling, but may underperform when markets are rising. The important thing to understand is that SIFs are ideally meant to bring nonlinear return behaviour. For example, in our fund, where the NFO is currently going on, we aim to have almost similar upside capture compared to equity savings funds, but with better downside protection. Typically, equity savings funds may have around 30% to 40% participation when markets are rising, and similar participation when markets are falling. So, their upside-to-downside capture ratio is close to one, or slightly above one. In our case, the upside capture may be similar to or slightly lower than an equity savings fund, but the downside participation should be much lower. This does not mean the fund will always be positive when markets are falling. There can still be losses. But the losses may be curtailed. A better word would be capped. So, the downside participation may be much lower.

Common Misconceptions About SIFs

Vidhi Mehta: Gaurik, there is one misconception about SIFs  that they are relatively conservative despite the flexibility a fund manager has. Is that true? And are there any other misconceptions about SIFs that investors should be aware of?

Gaurik Shah: There can definitely be conservative SIFs. But like mutual funds, SIFs can exist across the risk spectrum. There will be conservative SIFs, aggressive SIFs and long-only SIFs, which may work similar to long-only mutual funds. One misconception that existed initially was that SIFs would be very risky products. This was because derivatives are allowed in SIFs, and derivatives are generally perceived as risky because many investors have lost money in them. But if you look at it carefully, the risk in derivatives usually comes from leverage. Most of the losses that retail investors faced in derivatives were because of over-leverage. In an institutional framework, leverage is looked at very carefully. It is constrained and thoughtfully managed. In SIFs, leverage is not allowed at all. So, broadly, the risk is not going to be significantly higher than mutual funds only because derivatives are being used. At the same time, this also means that returns are not going to be extremely high. Another misconception is that since shorting is allowed, SIFs should make money when markets fall. But that is not how it works. In a diversified portfolio, a large part of the returns is still connected to market risk. In SIFs, only up to 25% shorting is allowed. So, most funds will still have positive market exposure. This means it is unlikely that SIFs will always be positive when markets are negative. There may be conservative SIFs with a different set of strategies that offer better downside protection. But even there, investors must understand that better downside protection may also mean giving up some upside. In an ideal world, when markets are falling, a fund manager would want to be short and make money. And when markets turn around, the fund manager would want to go fully long and benefit from the upside. But that is not how markets work. That is a very rosy picture. It is not practical.

Should Investors Look at Sectors and Themes in SIFs?

Vidhi Mehta: Are there any sectors or themes you prefer right now?

Gaurik Shah: That is an important question because in SIFs, instead of focusing only on sectors, themes, equity or debt allocation, investors need to assess the strategy. With derivatives, strategy becomes more important. In a traditional mutual fund, investors may look at how much is invested in equity, how much is in debt, and within equity, how much is in large cap, mid cap or small cap. But with derivative-based strategies, there is a difference between cash allocation and risk allocation. For example, an AIF Category III fund doing long-short strategies may have 90% to 95% of its cash deployed in liquid funds and only 5% to 10% in bank balance. On the surface, it may look like the portfolio is mostly in liquid funds.

But based on that, the fund may be taking futures exposure or options exposure. So, the risk exposure can be very different from the cash exposure.

Similarly, in SIFs, the important thing is to understand the kind of strategy the fund is deploying, rather than only looking at sectors or themes.

The strategy will explain the risk much better.

Introducing Mirae Asset Platinum SIF

Vidhi Mehta: Gaurik, we are now moving to our next segment Funds ka Funda. The idea is to talk about the funds you manage, understand the basic theme and strategy behind the fund, and why an investor may consider having it in their portfolio. Mirae Asset is launching its first SIF Platinum SIF by Mirae Asset. Let’s start with the core idea. What is the strategy for this SIF?

Gaurik Shah: The positioning of this fund is between an arbitrage fund and an equity savings fund. We call it an arbitrage-plus category, which is evolving within the SIF space. It broadly targets the conservative side of the risk-return curve. To understand this better, we need to understand the difference between arbitrage funds and equity savings funds. An arbitrage fund is a relatively flat-return product. It may give a certain amount of low return across market cycles. An equity savings fund is more of a linear return product. Typically, it may have around 30% to 40% market capture when markets are positive, and a similar 30% to 40% market capture when markets are falling. So, if markets are up 10%, an equity savings fund may be up around 3% to 4%. But if markets are down 10%, it may also be down around 3% to 4%. With our product, we expect to offer better upside capture and better downside protection. When markets are on a positive trend, we may offer an upside capture slightly lower than an equity savings fund. But when markets are trending downwards, our downside protection should be better.This is where the nonlinear nature of the product comes in. SIFs give fund managers certain flexibility, and that flexibility should be used to offer a different experience to investors. If we are offering something very similar to existing products, then the purpose of using the SIF structure is not fully served.

Strategy Behind Mirae Asset Platinum SIF

Vidhi Mehta: We have been discussing how strategy is the most important aspect that investors should look at in an SIF. For Platinum SIF by Mirae Asset, what is the strategy you have designed and how are you going to achieve it?

Gaurik Shah: There will be four building blocks in our fund. The first core strategy will be a collar strategy. The second will be arbitrage. Together, around 70% of our deployment will be between the collar strategy and arbitrage. Now, one has to understand the behaviour of a collar strategy. A collar strategy is a slightly complex derivative strategy, but to simplify it, it means there is a capped upside and a capped downside. If the market goes up to a certain point, the fund participates in that upside. But beyond a certain point, we may have to give up some of the profits. That is the covered call part of the strategy. However, in a covered call strategy, the downside remains fully unprotected. That is why we also buy a put on the downside. This helps cap the downside. That is the difference between a covered call and a collar strategy. We are following a collar strategy, not just a covered call strategy. This is why we are confident about providing downside protection to investors. But when we say downside is capped, it does not mean there is no downside. When markets fall up to the level where protection begins, investors may still see some losses. That is the nature of a collar strategy. It participates in market movement up to a certain point. So, when markets fall, there may be some losses, but the loss is expected to be capped. To reduce volatility arising from this strategy, we bring in arbitrage. For us, arbitrage acts like a cash call. When we think markets are trending downwards, we move more towards arbitrage. So, the allocation between the collar strategy and arbitrage will be flexible, based on market conditions. When market conditions are good and markets are trending upwards, we may allocate more to the collar strategy. When markets are trending downwards, we may allocate more to arbitrage. But this is not a zero-one game. It is not a binary call. It will be a graded approach. This is important because if you start taking binary calls, you can go completely wrong. For example, in March, one may have moved completely into arbitrage. But then if April brings a sharp recovery, you may completely miss out on the upside. So, allocation changes need to be managed in a more balanced and graded way. The third part of the strategy will be special situations. This is more of a return enhancer for us. If there are trades available in the market that can offer better returns compared to arbitrage or collar strategies, we may take them. These could include merger or demerger trades, buyback trades, open offer trades, or even IPO opportunities. We may not apply for anchor participation because of higher blocking, but we may participate for possible listing gains.

The fourth part is debt. The debt portion will be split into two parts. One will be the core portfolio, which will focus on accrual-based, high-quality credit strategy. The other will be the liquidity portfolio, which may include TREPS, T-bills and similar instruments.

Who Should Consider Mirae Asset Platinum SIF?

Vidhi Mehta: If an investor is considering investing in Mirae Asset Platinum SIF, how should they decide whether it is suitable for them or not?

Gaurik Shah: Earlier, investors were often classified as conservative or aggressive. A particular product was considered suitable for a conservative investor, and another product was considered suitable for an aggressive investor. But the market has evolved now. Most investors today have allocation across the risk spectrum. An aggressive investor may have higher allocation towards the aggressive side of the portfolio, but they will still have some allocation towards the conservative side. Similarly, a conservative investor may have higher allocation towards conservative products, but they may still have some allocation towards aggressive products. In that sense, this fund fits well on the conservative side of the portfolio. It has a distinct advantage compared to some of the products currently available. With some products, the advantage may be in terms of better alpha. With others, it may be in terms of better downside protection. That is why this product can be suitable for investors as part of the conservative side of their portfolio.

How Does Mirae Asset Platinum SIF Differentiate Itself?

Vidhi Mehta: Gaurik, last question. How would you differentiate Mirae Asset Platinum SIF from other funds available in the market?

Gaurik Shah: This is a product designed for the conservative side of the portfolio. Indian investors have evolved. Today, it is not just about being a conservative investor or an aggressive investor. Most investors have allocations across the risk spectrum. Even an aggressive investor may have some allocation on the conservative side of the portfolio. And even a conservative investor may have some allocation on the aggressive side. This product fits well on the conservative side of the portfolio and offers certain distinct advantages compared to currently available products. With some products, the differentiation may be in terms of better alpha. With others, it may be in terms of better downside protection. It brings nonlinear return and nonlinear risk behaviour to the table, which is not currently available in the traditional mutual fund framework.

Conclusion

Vidhi Mehta: Gaurik, thank you so much. It was a wonderful conversation with you.

Gaurik Shah: Thank you so much.

Disclaimer: Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.