SEBI’s SIF: Right Product on the Wrong Shelf

[Hardik is a student at National Law School of India University.]

India’s investment market was dominated by two groups of investors. Retail investors which invests through mutual funds (MFs) and ultra-high-net-worth individuals which uses portfolio management services (PMS). However, investors seeking more flexibility than an MF but unable to meet the INR 50 lakh minimum requirement of PMS had very limited options. SEBI, then, introduced the Specialised Investment Fund (SIF) through SEBI (Mutual Funds) (Third Amendment) Regulations 2024, and now codified into Chapter IX of the SEBI (Mutual Funds) Regulations 2026 (2026 Regulations). The detailed regulatory framework for SIF was laid down by SEBI’s circular of 27 February 2025.

The SIF was meant to bridge the gap between MFs and PMS. This paper argues that it creates new ones instead, and the 2026 regulation also plays a role in it. 

First, SEBI has placed a fund with investment strategies similar to Category III Alternative Investment Fund (AIFs) under the mutual fund regulatory framework, which weakens the protections built for a very different investor class. Second, the SIF framework permits the same fund manager to simultaneously manage a retail MF and a SIF operated by the same AMC. Third, Regulation 21(b)(vi) of the 2026 Regulations now directly conflicts with the SIF Circular’s approach to shared fund managers.

What Does SIF Actually Do?

Under Regulation 48(1) of the 2026 Regulations, a mutual fund registered under clause (e) of Regulation 3 may apply for SEBI’s approval to launch a SIF. According to Regulation 47(2), all provisions of the 2026 Regulations apply to SIF unless Chapter IX makes a specific provision to the contrary.

The SIF circular prescribes various permissible investment strategies. These include equity long-short fund, equity ex-top 100 long-short fund, sector rotation long-short fund, debt long-short fund, sectoral debt long-short fund, active asset allocator long-short fund, and hybrid long-short fund. All seven involve long and short positions. Further, the SIF circular permits derivatives to be used for purposes beyond hedging, which is capped at 25% of net assets. A similar strategy of investment is not available to conventional MF schemes, which may only use derivatives within the Board’s framework for hedging and portfolio rebalancing.

The strategy of using long-short derivatives represents a radical shift from the conventional mutual fund model. SEBI classifies such strategies as a defining characteristic of Category III AIF under Regulation 3(4)(c) of the SEBI (AIF) Regulations 2012. It is a fund that “employs diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives.”

These features bring SIF strategies closer to Category III AIF, but it does not have its label.

The Problem of Misclassification

This label matters because it determines which rules are applicable and, consequently, the protections available to the investors. 

According to Regulation 10(b)(i) of SEBI (AIF) Regulations 2012, Category III AIF requires a minimum investment of INR 1 crore per investor, whereas under Regulation 49(1) of the 2026 Regulations, a SIF shall not accept investment of less than INR 10 lakhs from any investor. This means investors who do not have the financial capacity to invest in a Category III AIF can now invest in functionally similar investment strategies through an SIF by investing only one-tenth of the amount. 

Similarly, with regard to the fund structure. Category III AIFs must be close-ended. Whereas under Regulation 50(2), an investment strategy under SIF may be launched as an open-ended, close-ended, or interval strategy, thereby providing greater liquidity than the AIF framework. However, there is a reason that a closed-end fund exists, as they protect the fund manager’s ability to execute positions without forced liquidation triggered by redemption requests of investors.

The serious concern is with respect to the leverage limits. Leverage means using borrowed money or derivative positions to increase investment exposure beyond the fund’s own capital. The leverage of category III AIF shall not exceed two times its net asset value, and this is a holistic cap on total exposure. Whereas, the SIF circular caps short exposure through derivatives at 25% of net assets. These are very different metrics, as the former governs total fund exposure relative to fund size, and the latter governs only one trade type. In the latter, the fund may comply with the 25% short-exposure limit even though its overall exposure is very large. Thus, the SIF framework does not have an overall leverage limit comparable to that of the AIF framework. 

The result is that SIFs are being allowed to use investment strategies that look very similar to those used by Category III AIFs, but they are being governed by a framework designed for diversified, retail-oriented funds like mutual funds. The mutual funds regime is based on the assumption that pooled investment products should be relatively conservative and suitable for a broad range of investors. However, SIFs are permitted to use more sophisticated and riskier strategies, which cause them not being subject to various safeguards and investor protections that would normally apply if the same strategies were offered through the AIF framework. 

The Shared Fund Manager

The SIF circular provides two routes to SIF eligibility. Under route 2, the asset management company (AMC) must appoint a dedicated Chief Investment Officer and an additional Fund Manager solely for SIF. Route 1, which requires only a three-year operating track record and average AUM of INR 10,000 crore, imposes no such requirement. The circular also permits the AMC to share staff and infrastructure across its mutual fund and SIF operations. Thus, neither route prohibits the same fund manager from simultaneously managing a retail MF scheme and a SIF investment strategy. Nor does SIF circular impose any obligation to disclose, or periodically explain, divergences in performance between the two products managed by the same individual.

This is completely opposite to the standard SEBI itself established in 2012. Its circular of 28 February 2012 required AMCs to appoint a separate fund manager for each separate product unless investment objectives and asset allocations were identical and the portfolio was replicated to the extent of at least 70%. Even in cases where shared management was permissible, AMCs were required to maintain a written trade allocation policy and were prohibited from taking directionally opposite positions across the managed products. These were preventive safeguards aimed at avoiding conflicts of interest. The SIF circular, however, removes these requirements under Route 1 and allows simultaneous management without similar protections. 

SEBI continued the same standard in Regulation 21(b)(vi) of the 2026 Regulations, which governs the permissible business activities of an AMC and requires the AMC to appoint a separate fund manager for each separate fund it manages, unless the investment objectives and asset allocation are the same and the portfolio is replicated across all such funds. Chapter IX of the 2026 Regulations, the dedicated SIF chapter, is completely silent on the question of fund manager sharing. Under Regulation 47(2), the general provisions of the 2026 Regulations apply to a SIF in the absence of any contrary provision in Chapter IX. This means that Regulation 21(b)(vi) applies to any AMC operating both a retail MF scheme and an SIF, and shared fund management is permissible only where the portfolios of the two products are substantially replicated, a condition that is structurally incompatible with the long-short strategies the SIF is designed to pursue.

Therefore, the primary regulation, which is the 2026 Regulations, requires portfolio replication as a precondition to shared fund management, while the SIF circular permits shared operational arrangements without that condition. This is a direct contradiction, as any AMC that structured its SIF under route 1 with a shared fund manager based on the SIF circular may be operating in contradiction to Regulation 21(b)(vi) of the 2026 Regulations. It also means that allowing the same manager to run both a mutual fund and an SIF creates an inherent conflict of interest in allocating investment opportunities precisely for which Regulation 21(b)(vi) was enacted to prevent. 

Conclusion

SIF was introduced for investors who needed more flexibility than the retail MF without the institutional minimum of PMS. However, the regulation has several structural problems. A fund with similar characteristics to category III AIF has been placed under retail MF regulation, thereby eroding the investor protections SEBI built into the AIF framework for exactly these strategies. 

Thus, to prevent dilution of safeguards available for retail investors, the above-mentioned problems could be addressed in the following manner:

First, SEBI should amend Chapter IX of the 2026 Regulations to include a suitable leverage cap for SIF strategies, similar to the 2x net asset value limit under the AIF framework. Furthermore, Chapter IX mainly defers the substance of SIF regulation to circulars. These should be included in the primary regulation of 2026. 

Second, SEBI needs to clarify the conflict between Regulation 21(b)(vi) of the 2026 Regulations and the SIF circular’s eligibility framework. Under route 1, no dedicated fund manager is required for SIF, and there is no restriction on shared fund management with a retail MF. Under route 2, dedicated SIF investment personnel are required. However, neither route addresses the portfolio replication requirement mandated by Regulation 21(b)(vi).