ET Alpha Wealth Summit 2.0: SIFs are Shahrukh Khan in portfolio says Radhika Gupta, Edelweiss Mutual Fund

Specialised Investment Funds (SIFs) may still be a relatively new category, but Radhika Gupta, MD and CEO of Edelweiss Mutual Fund, believes they are rapidly emerging as a versatile investment option for investors seeking greater flexibility beyond traditional mutual funds. Drawing on a Bollywood analogy, Gupta likened SIFs to Shah Rukh Khan—capable of playing different roles, from romance to action, but commanding a premium in the process.

The analogy captures what Gupta sees as the central proposition of SIFs: flexibility. Unlike conventional mutual fund categories that tend to have relatively defined mandates, SIFs give fund managers greater room to deploy strategies involving derivatives, hedging, arbitrage and market views. But Gupta cautioned that this flexibility also means investors need to understand exactly what they are buying rather than treating SIFs as a single, homogeneous category.

Speaking at the ET Alpha Wealth Summit 2.0, Gupta said the SIF category has completed its first year with assets of around Rs 38,000 crore. She highlighted the breadth of investor interest as one of the most encouraging aspects of the category, with transactions coming from beyond large family offices and corporate investors and growing participation from Tier-2 and Tier-3 cities.


Also Read | ET Alpha Wealth Summit 2.0: Equities aren’t enough? Praveena Rai makes a case for commodities

According to Gupta, the investment strategies available through SIFs are not entirely new. Similar approaches existed through Category III AIFs, PMS structures and certain mutual fund strategies, including covered calls and other derivative-based approaches.

The challenge, she said, was accessibility. Investors faced higher entry requirements and more complicated taxation, with some products requiring ticket sizes of Rs 50 lakh or Rs 1 crore.

SIFs, in Gupta's view, have changed the proposition by getting the “packaging” right. The underlying strategies may have existed earlier, but putting them into a more accessible structure has made them relevant to a broader investor base.

She also stressed that investors should not buy a product simply because it is new or fashionable. The starting point, according to Gupta, should be the problem an investor is trying to solve.

For example, the need for income and tax-efficient, relatively low-risk returns remains a genuine portfolio requirement. Gupta believes SIFs can potentially address some of these needs by using the flexibility provided by the regulatory framework.

Despite the strong early interest, Gupta cautioned investors against expecting SIFs to deliver the best of every market environment. She argued that no single financial product can simultaneously outperform aggressive equity benchmarks during bull markets and provide the characteristics of a fixed deposit during downturns.

For her, setting the right expectations is therefore critical. Investors need to understand the intended role of a particular SIF, the appropriate investment horizon, the risks involved and the possibility of periods of negative performance.

Gupta cited the example of Edelweiss's Hybrid Long Short SIF, which she said is positioned as “arbitrage plus” rather than as a product designed to maximise returns during a strong equity rally. She emphasised that investors should not interpret periods of high annualised returns as a promise of consistently strong performance.

That distinction becomes particularly important as the category grows. Gupta noted that strategies that are relatively easy to execute in a Rs 100-200 crore portfolio can become considerably more difficult to implement as assets scale. She pointed to the Hybrid Long Short strategy reaching around Rs 12,000 crore as an example of the importance of testing whether a strategy can continue to deliver as fund sizes increase.

One of Gupta's strongest messages for investors is that SIFs should not be evaluated as a single category.

Unlike conventional mutual fund categories, where regulatory definitions can create relatively narrow investment mandates, SIF strategies can vary substantially. Gupta pointed out that derivatives—the key flexibility provided within the framework—can be used for very different purposes.

They can support relatively low-risk arbitrage strategies, income-oriented hedging approaches such as covered calls, or more directional market views. A fund manager could, for instance, take a bullish view on banking and a bearish view on IT. If both views prove wrong, the strategy can suffer on both sides. That makes due diligence particularly important.

Gupta warned investors and advisers against simply ranking SIFs by performance and selecting the highest-ranked product. Instead, investors need to examine the strategy, the use of derivatives, the risk being taken and the role the product is intended to play within the broader portfolio.

Also Read |ET Alpha Wealth Summit 2.0: Bear markets can breed best investment ideas, says Nilesh Shah

SIFs versus AIFs and PMS

Gupta also highlighted taxation as an important distinction between SIFs and some alternative investment structures. Drawing on her experience of running a Category III AIF and a wealth-management business, she explained how taxation can materially affect the pre-tax returns required to deliver a particular post-tax outcome.

She illustrated the difference by noting that generating 8% in hand through a Category III AIF could require a substantially higher pre-fee return because of taxation, fees and carry. Under the SIF structure, she argued, the required return to achieve the same post-tax outcome can be lower.

PMS structures, meanwhile, can create another tax consideration because investors may incur capital-gains taxation on individual portfolio transactions. Gupta said moving a concentrated mid- and small-cap strategy from PMS to an SIF structure could provide a tax advantage under the applicable framework.

Gupta also sought to distinguish SIFs from retail derivatives trading. She pointed out that SIFs are not permitted to use leverage. That differentiates them from retail futures and options trading, where investors can take positions with multiples of their capital.

The use of derivatives within an SIF, therefore, needs to be assessed based on the strategy for which they are being deployed rather than treated as synonymous with leveraged speculation.

At the same time, Gupta acknowledged that derivatives expertise is still relatively scarce in India's asset-management industry. The country has historically been dominated by long-only investing, while much of the derivatives talent has traditionally been concentrated in proprietary trading desks. As SIFs scale, attracting and retaining specialised talent could become an important differentiator among fund managers.

One reason Gupta believes the first year has been particularly revealing is that SIFs have not been launched into an easy bull market. She noted that the equity index had fallen by roughly 10-12% over the period under discussion, meaning SIF managers had to demonstrate their strategies in a challenging market environment.

Gupta highlighted March as an important test for Edelweiss's Hybrid Long Short strategy. While the broader index fell sharply, the fund itself was not positive—it declined around 1.5%. However, she said the subsequent tripling of daily flows demonstrated that investors were beginning to understand the strategy's intended role rather than expecting it to behave like a guaranteed positive-return product.

The broader message, she said, is that SIFs should not be viewed as “magic” products. Their value has to be assessed in the context of their objective, risk profile and performance across different periods.

As SIFs proliferate, Gupta's advice to investors is to resist the temptation to simply accumulate new products. She advocates what she calls “purposeful investing” or “shopping-list investing”. The idea is to begin with the investor's asset-allocation requirements and then identify products that fulfil those needs, rather than buying every new scheme that enters the market.

For example, an investor with an 18-month allocation may consider whether an arbitrage strategy or a hybrid SIF is appropriate for that portion of the portfolio. Similarly, an investor already holding a mid- and small-cap mutual fund could assess whether part of that allocation should instead be exposed to an SIF with a different strategy.

The objective, Gupta stressed, is not to replace mutual funds with SIFs. Both can coexist, with investors gradually finding the right balance between the two based on their objectives and portfolio requirements.

Also Read | ET Alpha Wealth Summit 2.0: Will the $8 trillion AI bet pay off? Nilesh Shah weighs in

For investors considering the category for the first time, Gupta recommends a measured approach.

She suggested starting with a relatively conservative hybrid SIF, understanding how the strategy works and becoming familiar with its performance characteristics before increasing the allocation. She also emphasised that investors should never be in a hurry to invest in a financial product they do not understand.

That approach could become increasingly important as more SIF strategies enter the market and investors are presented with a wider range of choices.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get them answered by our panel of experts. Do share your questions at ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle