Indian mutual fund houses can now offer a variety of products similar to international hedge funds, opening up new growth opportunities for them
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SEBI’s recently introduced norms on Specialised Investment Funds (SIFs) could prove to be a game-changer for India’s mutual fund industry. The new framework means that Indian Asset Management Companies (AMCs) can offer a whole new range of sophisticated products, with varying degrees of risk and return, to a wider investor base. Most importantly, the entry threshold amount of ₹10 lakh for these instruments will enable a much larger portion of investors to take advantage of sophisticated instruments that include long-short funds and derivatives for two-way hedging.
Until now, those instruments were only available to investors who could commit upwards of ₹1 crore. Category III Alternative Investment Funds (AIFs), which are permitted to pursue strategies such as long-short investing, were out of reach for a great many investors.
The product will effectively give a viable option to those looking to take advantage of Portfolio Management Services (PMS), at a lower ticket size. Investor participation in Indian stock markets has increased significantly in the past decade and there are many investors with holdings of over ₹10 lakh. These investors would welcome the opportunity to invest in instruments such as SIFs.
More leeway
In short, Indian AMCs will be able to better serve a rapidly growing segment of the Indian investment community, clamouring for these sophisticated financial products.
So far, Indian mutual fund houses have been restricted to offering long-only products. Now, they can offer a variety of products similar to international hedge funds, opening up new growth opportunities for them. Further, mutual funds can now also increase their market share in the buy-side community, both in terms of assets under management and trading volumes. Recent market volatility on global markets has provided a timely reminder of the importance of risk management, and this change stands to give an entire new class of investors access to important risk management tools via SIFs at a critical moment.
Many, if not most, recent entrants to Indian markets over the past five years have only experienced a bull run of sorts, but with the global dynamic changing so swiftly, SEBI has rightly identified the growing need for investment products that make sense during market contractions.
That’s the good news. Although the new framework undeniably brings exciting opportunities, it also presents new challenges and potential risks for mutual funds. The new framework will require them to set up separate structures to house the SIF setups, which will necessitate new levels of regulatory compliance. Offering sophisticated products with varying degrees of risk and return means robust risk management strategies matter now more than ever. Mutual funds must be prepared to manage increased volatility and potential losses that this new setup could bring.
My discussions with various managers across India’s leading mutual funds indicate two things: Firstly, palpable excitement about what this means for the maturity of the industry. And secondly, and more importantly, a recognition that preparation matters a great deal. Those fund managers looking to move into this newly available space will have to think carefully about their capabilities: be they human resources, technology, processes or governance.
Increased regulatory and volume requirements from mutual funds would call upon them to also invest in upgrading their technology for pre-trade compliance checks, execution capabilities, and transaction cost analysis among other things. However, in part because of these new reforms, the case for that investment can be easily made.
As mutual funds adapt to these changes, we can expect a more mature and dynamic market that caters to diverse investor needs, ultimately driving growth and innovation across India’s investment landscape.
The writer is Head – South Asia, Bloomberg LP. Views expressed are personal
Published on April 10, 2025
