Wealth managers turn to hybrid SIFs for higher, tax-efficient returns

Mumbai: The introduction of specialised investment funds (SIFs) is changing the way wealth managers structure portfolios, with hybrid SIF strategies increasingly finding a place in allocations that were earlier dominated by debt mutual fund and other fixed income products.

Wealth managers are asking investors with sizeable mutual fund portfolios to allocate some money to SIFs, citing their tax efficiency and differentiated strategies.

"SIFs offer greater flexibility through strategies such as long-short investing, dynamic asset allocation, sector rotation and hedging and should be used to complement core portfolios," says Sandeep Seth, founder & CEO, SIF360.com,


Fund houses have launched SIFs across hybrid long-short, equity long-short and equity ex-Top 100 long-short strategies. Assets under management of SIFs reached ₹23,177 crore as of July 31, with 95,000 investors and an average ticket size of ₹21 lakh. Hybrid SIFs accounted for ₹16,523 crore, or 71%, of the total assets under management.

Within SIFs, wealth managers are starting with hybrid long-short strategies, which they believe work well for conservative investors seeking tax efficiency and slightly higher returns than bank deposits or debt mutual funds over a one-to-three-year period. They prefer to wait for a track record of around a year to assess performance and consistency before recommending equity-oriented SIFs.

Some hybrid SIF strategies have negligible exposure to unhedged equity. These strategies invest through a mix of arbitrage, special situations, pair trades, covered calls, straddles, strangles and put-call parity, and could work for investors seeking tax efficiency in their fixed-income allocation.

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"Hybrid SIF strategies that are low on equity can earn 1-2% more than deposits or debt funds with high tax efficiency," says Juzer Gabajiwala, director, Ventura Securities. Investors in hybrid SIFs who remain invested for more than 12 months are charged a long-term capital gains tax of 12.5%. In comparison, investors in fixed deposits or debt funds pay tax at their applicable slab rates, which exceed 30% in the case of high-income investors.

Fund managers, however, said investors need to understand the risks involved, as some SIFs can have a high proportion of their portfolios in unhedged equities or carry credit risk.

"Investors should look at the return, standard deviation, maximum drawdown and beta, to understand the risk that a SIF takes," says Radhika Gupta, MD & CEO, Edelweiss Asset Management.