Specialised Investment Funds (SIFs) let you bet on both rising and falling stocks, but are they right for you?

Welcome to the world of Specialised Investment Funds (SIF)s. Here, falling markets are another way to make money. However, it is not for the faint hearted, but for savvy investors.

The Quant SIF Equity Long-Short Fund (QSIF) will operate as India’s first long-short equity fund under SEBI’s newly introduced SIF category. It uses a hedge-fund-style investment strategy that allows it to take both long positions and short positions simultaneously or in opposition. SIFs operate under the mutual fund framework and are subject to more rigorous regulatory oversight, offering stronger protections and safeguards for investors.

In volatile markets, shorting gives investors a new edge, enabling them to earn returns when stocks fall. “If you have strong research, good analytics, and a solid macro view, shorting allows you to generate alpha from both sides of the market. You’re no longer dependent only on stocks rising. That ability to profit from falling stocks—legally and within a SEBI-regulated framework—is a serious tool for investors who know how to use it,” says Sandeep Tandon, founder and Chief Investment Officer (CIO) of Quant Mutual Fund.

Understanding the long-short Strategy

The fund follows a long-short strategy. It will buy stocks expected to increase in value and simultaneously short stocks anticipated to decline. This strategy allows it to generate returns regardless of market direction by capitalising on both rising and falling stock prices.

The fund manager determines which stocks to go long or short on by using a combination of fundamental and technical analysis. “So for long positions (stocks to buy), the fund would identify stocks expected to appreciate based on strong fundamentals such as good earnings potential, attractive valuation metrics like price-to-earnings ratio, and positive industry or economic conditions,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.

SIF vs MFs

These picks might also show positive technical signals like price trending above key moving averages or strength in volume and momentum indicators.

“Similarly for short positions (stocks to sell through futures & options), the fund would select stocks expected to decline or underperform based on weaker fundamentals, overvaluation, or deteriorating sector dynamics,” says Krishna.

Technical indicators such as sustained downtrends, price falling below moving averages, and weakening momentum might signal candidates for shorting.

In both the strategies, the fund may also use screening tools to filter stocks by criteria like market capitalisation, sector, momentum, and trading volume to narrow down choices for longs and shorts.

“Besides equities, the fund can swiftly shift investments across asset classes such as debt and derivatives, providing adaptability to changing market environments. Hence, it follows a multi a-asset strategy,” says Krishna.

The fund also operates in a regulated and transparent environment as it complies with SEBI’s strict regulations, including risk management measures, disclosure of net asset values, and investment limits. This ensures investor protection under a mutual fund framework.

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Tax treatment: More aligned with mutual funds

In terms of taxation, SIF follows the mutual fund, which makes it significantly more tax efficient than an AIF or PMS. “One of the biggest advantages of SIFs is that they offer mutual fund taxation, which, combined with their equity focus and better risk matrix, makes them a superior product overall,” says Tandon.

“For equity oriented SIFs like QSIF the short term capital gains are taxed at 20 percent and long term capital gains at 12.5 percent, with gains up to Rs 1.25 lakh being tax exempt,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and Chief Investment Advisor of SahajMoney, a financial planning firm.

Unlike PMS where frequent rebalancing triggers immediate tax liabilities, SIF investors pay taxes only at the time of redemption, allowing for better compounding of returns.

“This tax efficiency is particularly beneficial for long-short strategies that involve frequent trading, as the fund level operations don’t create taxable events for individual investors until they exit the fund,” says Kumar.

However, unlike some AIF or PMS structures where indexation benefits may apply for long-term gains, SIF investors do not get indexation on LTCG, potentially leading to a higher tax burden for longer holding periods.

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Tailored for high-net-worth Investors

SIFs require a minimum investment of Rs 10 lakh, which is significantly lower than the Rs 50 lakh minimum for portfolio management services (PMS) and the Rs 1 crore required for alternate investment funds (AIF)s. “This reduced entry barrier makes SIFs accessible to a broader range of investors. Additionally, because SIFs operate under the mutual fund framework, they are subject to more rigorous regulatory oversight, offering stronger protections and safeguards for investors,” says Alekh Yadav, Head of Investment Products at Sanctum Wealth.

Thus, the fund is not for everyone. With a minimum investment threshold of Rs 10 lakh, It is designed for high-net-worth investors (HNIs), reflecting its high-risk, sophisticated strategy focus.

What you should keep in mind

The SIF at best should be used as a part of one’s satellite portfolio for diversification and risk management rather than as a part of the core portfolio.

“If you’re a savvy investor looking to balance risk and return, I’d suggest this: out of every Rs 100 you want to invest, put Rs 50 into mutual funds, and maybe Rs 15 into SIF. The balance can be in fixed income or cash equivalents. But that Rs 15 can really smooth out the volatility and provide alpha during tough cycles,” says Tandon. Such funds could be useful for sophisticated investors who want to hedge their equity investments.