The Securities and Exchange Board of India’s new Specialized Investment Funds (SIFs) framework has officially come to life with the Quant Mutual Fund receiving regulatory approvals to launch the country's first long-short fund.
SEBI's introduction of the SIF framework, effective from April 1, 2025, is designed to bridge the gap between traditional mutual funds and Portfolio Management Services (PMS). SIFs are meant to offer a new, regulated category of investment that provides more flexibility and sophistication. Under this framework, a long-short equity fund must invest a minimum of 80% in equity and can have a maximum of 25% short exposure through unhedged derivative positions.
What is a long-short fund?
A long-short fund is an investment fund that employs a dual strategy to generate returns. Unlike a traditional "long-only" fund, which only buys assets it expects to rise in value, a long-short fund takes both "long" and "short" positions.
Long Positions: The fund buys securities (e.g., stocks) it believes are undervalued and will increase in price. This is the conventional way of investing, where the fund profits from a rising market.
Short Positions: The fund borrows a security and sells it, expecting its price to fall. It then buys the security back at a lower price to return it, pocketing the difference. This strategy allows the fund to profit from declining asset prices.
By combining these approaches, a fund manager can express both bullish and bearish views on specific companies or sectors. This can be used to generate returns in different market conditions—not just bull markets, and can also serve as a hedge to mitigate risk.
The Opportunity and the Challenge
While the launch of a long-short SIF is a positive step for investor choice, it also raises important questions about the practical application of these strategies in the Indian market. Does the Indian market have enough fund managers with the expertise and conviction to short effectively? Shorting requires a deep understanding of risk management and a contrarian mindset, which has not been a widespread skill in India's historically long-biased market.
The success of SIFs will also depend on the readiness of distributors, many of whom lack the certification and expertise in derivatives necessary to sell these complex products effectively to investors.
To address these concerns, some argue that SEBI should consider a minimum short exposure threshold for SIFs to ensure they are truly distinct from long-only funds. This would prevent the "long-short" label from becoming a mere marketing tool without meaningful execution.
Is an SIF Right for You?
An SIF is designed for a specific type of investor. It is likely a good fit for you if -- you have at least ₹10 lakhs to invest; you are comfortable with higher-risk, sophisticated strategies that involve derivatives; and you do not require immediate liquidity, as SIFs may have less frequent subscription and redemption windows.
SIFs use risky investment strategies, and it involves short exposure through unhedged derivatives positions in equity, equity-related and even debt instruments. Therefore, investors must assess their risk-taking capabilities before investing in such funds.