To prevent retail investors from handing over large sums to unregulated entities in the search for high returns, the Securities and Exchange Board of India (SEBI) has proposed a new product class between mutual funds and Portfolio Management Services (PMS). The regulatory framework for this product, to be named Specialised Investment Funds (SIFs), was notified last week. It leans more towards the strict rules governing mutual funds, rather than the light-touch regulations which are in force for PMS.
This may ensure reasonable investor protection guardrails for a product where the starting ticket size will be ₹10 lakh, compared to just ₹250 for mutual funds. However, given the strategies proposed to be offered by SIFs and the fund industry’s lack of track record in managing them, SIFs may not take off all that quickly. To keep out fly-by-night entities, SEBI has proposed to let only registered Asset Management Companies (AMCs) launch SIFs — under a new vertical. The AMC will either need a track record of three years with ₹10,000 crore in assets or a Chief Investment Officer with 10 years’ experience managing ₹5,000 crore, to launch this product. SEBI could have stayed with the first condition, since individual managers cannot substitute for the governance and track record of an institution. To ensure retail investors are not confused, AMCs have been asked to create distinctive brands for their SIFs, with the facility to use their parent brand only for the first five years. SIFs will need to adhere to all the extant MF regulations, except in the following respects.
Single-issuer limits for debt SIFs will be at 12-20 per cent of portfolios compared to the 10 per cent mandated for MFs. SIFs have been allowed to take active derivatives exposure of up to 25 per cent, which is not allowed to MFs. SIFs can allow investment and redemption at intermittent intervals, in contrast to MFs which are either open-ended or close-ended. They need to disclose portfolios every alternate month and use scenario analysis to make risks clear to investors. However, the initial set of investment strategies for SIFs is rather unexciting. The list has three variations of long-short equity funds (a plain vanilla fund, a fund that excludes the top 100 stocks and a fund that rotates sectors), two varieties of long-short debt funds and two such hybrid funds.
Globally, long-short strategies, which entail simultaneous buy and sell positions in an asset to remain direction-neutral on markets, are used mainly by hedge funds patronised by very wealthy investors. Long-short strategies target an absolute risk-adjusted return, rather than trying to max out returns from an asset class. Whether these strategies will appeal to retail investors remains to be seen. Indian AMCs also have no track record in long-short products and have minimal active presence in the derivatives market. The mutual fund industry may need to come up with more diverse strategies, if it wants to taste success in SIFs.