ET Alpha Wealth Summit 2.0: Radhika Gupta says financial products must solve real investor needs

Specialised investment funds, or SIFs, are products built around particular investment strategies and investor needs. They can package approaches previously available through Category III AIFs, portfolio management services and some mutual fund categories. Their importance lies in giving investors another regulated structure for accessing these strategies.

Unlike ordinary mutual funds, SIFs may use different approaches within the regulatory framework. Derivatives can support arbitrage, covered-call hedging or directional market positions. However, SIFs cannot use leverage. This means their flexibility does not guarantee better returns or protection from losses. Each scheme still has its own objective, horizon and risk profile.

The category is not meant to replace every mutual fund. Gupta said mutual funds and SIFs are likely to coexist. Investors should choose between them according to their needs, portfolio role, taxation and risk tolerance, rather than selecting an SIF simply because it is newer or more specialised.

SIFs reached around Rs 38,000 crore in industry assets under management during their first year. That figure signals significant early interest in a relatively new investment category. The interest was not confined to family offices or large corporate investors. Conversations and participation also extended to investors in tier-II and tier-III cities.

Edelweiss Mutual Fund had become the largest SIF manager, with approximately Rs 14,000 crore at the time of Gupta’s discussion. Its assets therefore represented a substantial portion of the category’s reported assets. The figures provide a snapshot of the market’s early concentration and scale.

The numbers do not show that every SIF strategy performed well or carried similar risk. Gupta stressed that SIFs have materially different risk-return profiles. Investors should therefore examine each scheme’s objective, process, taxation and likely portfolio role instead of relying only on industry size or performance rankings.

SIFs are intended to address a practical problem: investors may want regular income while keeping more of their returns after tax. Gupta said this need had become more pronounced since 2023. The concern was especially relevant for people using fixed-income products, where taxes can reduce the amount ultimately retained.

An investor seeking an allocation for an 18-month horizon could examine whether an income-oriented hybrid SIF fits that purpose. Such a strategy may combine market exposures and derivatives, but it will not necessarily outperform equities in every rally or behave like a liquid fund in all conditions. Its objective and risks matter.

SIFs are not automatic solutions for income or taxation. Gupta urged investors to assess their entire portfolios and understand the product’s structure. Equity, debt and hybrid SIFs can receive different tax treatment. The appropriate choice depends on the investor’s time horizon, risk profile, existing allocation and intended portfolio role.

Taxes reduce the return an investor keeps by taking a portion of investment income or gains. The article does not provide a specific tax rate or numerical example, but it notes that fixed-income investors could be left with relatively lower returns after tax. This makes the after-tax outcome more important than the advertised or pre-tax return.

Product structure matters because different SIF categories receive different treatment. Equity SIFs are taxed broadly like equity mutual funds. Debt SIFs follow the treatment applicable to debt mutual funds. Hybrid SIFs have a different structure, with taxation linked to their treatment as interval funds or listed securities.

A tax-efficient structure is not automatically the best choice. Gupta said investors should assess products within their portfolios rather than select them only because taxation appears attractive. Risk, investment horizon, strategy and asset allocation still determine whether the retained return is appropriate for the investor’s goal.

Derivatives are tools, not a single investment strategy. Gupta said they can be used for arbitrage, hedging through covered calls or taking directional market positions. These purposes expose investors to different sources of return and risk, even when the products belong to the same SIF category.

For example, an income-oriented hybrid long-short SIF may use covered calls to support a hedging or income strategy. Another SIF may use derivatives to take a directional market position. The first may not outperform equities during a strong rally, while the second may respond more directly to market movements. Neither should be judged by the other’s results.

This is why Gupta cautioned against comparing SIFs only through performance rankings. Investors must understand each scheme’s objective, process, time horizon and risk profile. Fund managers also need consistent execution as assets grow, because strategies that work in smaller funds may become harder to scale.

SIFs package investment strategies that previously existed in structures such as Category III AIFs, portfolio management services and certain mutual fund categories. Their purpose is not simply to replace those vehicles. They offer another regulated format that may make some strategies more accessible or relevant to a broader group of investors.

The article links SIF appeal partly to investment flexibility permitted under the regulatory framework. Earlier, access thresholds and taxation could make some strategies less attractive or accessible. Within SIFs, derivatives may be used for arbitrage, covered-call hedging or directional positions. SIFs are not permitted to use leverage, however.

Tax treatment depends on the SIF type. Equity SIFs are broadly taxed like equity mutual funds, debt SIFs follow debt mutual fund treatment, and hybrid SIFs have a different structure. Mutual funds and SIFs are expected to coexist, with investors choosing based on requirements, strategy, access, taxation and portfolio purpose.

Investors should first identify what an existing portfolio allocation is meant to do. The relevant questions are whether the allocation seeks income, growth, diversification or a goal over a particular period. An SIF can then be considered as a replacement or complement only if its objective, risk and horizon match that purpose.

For example, someone with an allocation intended for an 18-month horizon could evaluate whether a hybrid SIF fits. Someone already exposed to mid-cap or small-cap investments could consider shifting part of that allocation, but only after examining the SIF’s strategy and overall asset mix. Performance alone is not enough because SIFs have different risk-return profiles.

Gupta called this “purposeful investing.” Investors should understand possible negative periods, taxation and execution risks before deciding. The SIF may complement an existing holding or replace it, but the decision should follow portfolio needs rather than product novelty or apparently attractive tax treatment.