SEBI unveils regulatory framework for specialized investment funds

The Securities and Exchange Board of India (Sebi) has introduced a comprehensive regulatory framework for Specialized Investment Funds (SIFs), aimed at bridging the gap between mutual funds and Portfolio Management Services (PMS). The new regulations, effective from April 1st, mandate a minimum investment of Rs 10 lakh across all SIF strategies. This move by Sebi is designed to provide investors with greater portfolio flexibility while ensuring a level of investor protection. The Rs 10 lakh investment threshold, however, does not apply to accredited investors.

Key Highlights of the New SIF Framework:

Minimum Investment: Investors must maintain a minimum investment of Rs 10 lakh. Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs) are permitted, but the total investment must remain above the threshold. If market fluctuations cause the investment value to fall below Rs 10 lakh, investors can only redeem the entire remaining amount.

Investment Restrictions: Stringent rules are in place regarding debt security investments. An investment strategy under SIF shall not invest more than 20% of its NAV in debt and money market securities issued by a single issuer and rated AAA or 16% in securities rated AA or 12% in securities rated A and below. These instrument limits may be extended by up to 5% of the NAV of investment strategy with prior approval of trustees of MF and board of AMC. An investment strategy under the SIF shall not invest more than 25% of its NAV in debt and money market securities of a particular sector.

Eligibility Criteria: Registered mutual funds can establish SIFs if they meet specific criteria via two routes. Route 1 requires a minimum of three years of operation with an average Asset Under Management (AUM) of Rs 10,000 crore. Route 2 allows funds to qualify by hiring a Chief Investment Officer (CIO) with atleast ten years of experience and an additional fund manager of of at least 3 years experience. Both routes require a clean regulatory track record.

Derivatives and Redemptions: SIFs can utilize up to 25% exposure in derivatives for non-hedging purposes. Funds can have varying subscription and redemption frequencies, with a maximum 15-day notice period for redemptions. Closed-ended and interval funds must be listed on stock exchanges.

Risk Management and Transparency: Funds with non-daily redemptions will be classified as "Interval Investment Strategies." A single-tier benchmark system will be implemented. Risk levels are categorized into five bands and will be reviewed monthly. Only certified distributors are authorized to sell SIFs. Stringent disclosure requirements, including portfolio details, liquidity risks, and scenario analysis, have been mandated. Advertisements must carry a standard risk disclaimer.

Sebi's new framework is expected to enhance transparency and investor protection in the specialized investment fund space, while providing greater flexibility for sophisticated investors.

Outlook:

The selling spree in local stock markets has continued unabated with NIFTY50 index testing around nine month low in first week of March 2025. However, the equity inflows data is reflecting a steady picture for liquidity and retail investors also seem to holding onto their long term investing narrative. The monthly mutual fund SIP inflows came in above the Rs 26,000 crore mark for the second consecutive month, at Rs 26,400 crore in January, after hitting Rs 26,459 crore in December. The number of new SIPs registered in January 2025 stood at 56.18 lakh, marking a steady rise compared to 54.27 lakh in December. The SIP AUM for January 2025 was recorded at Rs 13.19 lakh crore, compared to Rs 13.63 lakh crore in December 2024.

On the regulatory front, Mutual funds will now have to give a reasonable timeframe within which they will deploy funds collected through new fund offers (NFOs) and ensure that the funds are deployed within 30 business days from the date of allotment of units, said a SEBI circular on Thursday. Trustees have been asked to ensure that the funds are deployed within a reasonable timeframe. In the circular issued on February 27, the Securities and Exchange Board of India (SEBI) said that amendments have been made to SEBI (Mutual Funds) Regulations to encourage asset management companies (AMCs) to collect only as much funds in NFOs as can be deployed in a reasonable period of time and to discourage any mis-selling of NFOs of the mutual fund schemes.