A New Asset Class: Decoding SEBI’s Specialized Investment Fund Framework (2025)

Policy Update
Sruti Halder

Background

India’s investment-management landscape has traditionally offered mutual funds for relatively standardised pooled investments and Portfolio Management Services (PMS) for investors seeking greater portfolio flexibility. SEBI identified a regulatory gap between these two products: investors seeking more sophisticated strategies could require greater flexibility than conventional mutual funds provide, while PMS involves a substantially higher minimum investment. To address this gap, the Securities and Exchange Board of India (SEBI) introduced the Specialized Investment Fund (SIF) framework in February 2025. The framework was designed to provide sophisticated investors with greater investment flexibility while retaining the regulatory structure and investor-protection framework associated with mutual funds (SEBI, 2025).

The framework originated through amendments to the SEBI (Mutual Funds) Regulations, 1996. SEBI’s February 27, 2025 circular stated that the framework would come into force from April 1, 2025, making SIF the newest category within the regulated mutual-fund ecosystem (SEBI, 2025).

The principal objective is to create a regulated product for investors who require strategies beyond conventional mutual-fund mandates. SIFs are therefore positioned between mutual funds and PMS in terms of investment flexibility and investor sophistication. The framework is targeted primarily at high-net-worth and sophisticated investors rather than the mass retail segment. The minimum investment requirement is ₹10 lakh across all SIF investment strategies at the PAN level, although accredited investors are exempt from this threshold (SEBI, 2025).

A key driver of investor interest is tax treatment. SIFs are structured to inherit the mutual-fund pass-through regime: the fund itself is not taxed at the fund level, with income and gains taxed only in investors’ hands, consistent with the exemption available to mutual funds under Section 10(23D) of the Income Tax Act.

Equity-oriented SIF strategies are taxed at 12.5% for long-term capital gains (holding period over 12 months) and 20% for short-term gains, mirroring equity mutual fund taxation, while debt-oriented strategies are taxed at the investor’s applicable slab rate. This stands in sharp contrast to PMS, where each portfolio transaction executed on the investor’s behalf triggers an individual, immediate capital-gains event, making SIFs materially more tax-efficient for investors seeking sophisticated strategies without the compounding tax friction of direct security ownership. 

Source: SEBI, Regulatory Framework for Specialized Investment Funds, 2025.

Eligibility for asset-management companies (AMCs) is deliberately stringent. Under the first route, a mutual fund must have operated for at least three years and maintained average AUM of at least ₹10,000 crore during the preceding three years. An alternative route allows an AMC to qualify through experienced investment professionals: specifically, a Chief Investment Officer with at least ten years of fund-management experience who has managed an average AUM of not less than ₹5,000 crore, together with an additional fund manager with at least three years of experience and a track record of managing an average AUM of not less than ₹500 crore, subject to a clean regulatory record for the sponsor/AMC over the preceding three years (SEBI, 2025). 

The framework permits three broad categories of investment strategies: equity-oriented, debt-oriented and hybrid. At inception, SEBI specified strategies such as Equity Long-Short, Equity Ex-Top 100 Long-Short, Sector Rotation Long-Short, Debt Long-Short, Sectoral Debt Long-Short, Active Asset Allocator Long-Short and Hybrid Long-Short strategies. An important distinguishing feature is the ability to undertake unhedged short exposure through derivatives, subject to a ceiling of 25% of net assets (SEBI, 2025).

However, the framework has subsequently been refined. SEBI issued clarifications in April 2025, including clarification regarding the minimum investment threshold and the applicability of certain mutual-fund provisions. In July 2025, SEBI separately prescribed mechanisms for monitoring compliance with the ₹10 lakh threshold. In January 2026, it introduced standardised compliance-reporting formats for SIFs, strengthening supervisory oversight.

Functioning

SIFs operate within the mutual-fund regulatory architecture rather than as a completely separate investment vehicle. An eligible mutual fund obtains SEBI approval to establish an SIF, after which investment strategies are launched according to the prescribed regulatory framework. The AMC and trustees remain responsible for governance, while fund managers must possess the relevant National Institute of Securities Markets (NISM) certification. The same mutual fund does not need to establish a separate trust for the SIF (SEBI, 2025–2026).

The framework combines greater portfolio flexibility with investment restrictions intended to limit concentration and credit risk. For example, an investment strategy generally cannot invest more than 10% of its NAV (Net Asset Value) in the equity shares and equity-related instruments of a single company. The overall SIF cannot own more than 15% of a company’s paid-up voting capital. Debt exposure is also subject to issuer and sector limits, while investments in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are subject to specified ceilings (SEBI, 2025). 

The functioning of SIFs therefore differs from PMS in an important institutional respect. Although strategies can employ sophisticated techniques such as long-short positions, investors continue to participate through a regulated pooled investment structure. This preserves common mutual-fund mechanisms such as NAV-based valuation, disclosures, trusteeship and regulatory reporting while allowing substantially greater strategy flexibility.

This design choice reflects SEBI’s characteristic institutional conservatism: rather than creating a lightly regulated vehicle to match PMS-style flexibility, SEBI chose to expand what is permissible within the mutual-fund framework itself, so that greater investment freedom is extended without diluting the disclosure, custody, trusteeship and reporting standards that have historically underpinned investor protection in the mutual-fund ecosystem. The result is a product that innovates at the level of permitted strategy, while remaining conservative at the level of structural safeguards. 

Redemption terms under SIFs are more varied than under conventional open-ended mutual funds, reflecting the underlying complexity of long-short strategies. Each SIF strategy is structured as either open-ended, close-ended, or an interval fund, and the redemption frequency is calibrated to the liquidity of the strategy’s holdings. Equity long-short strategies are typically open-ended with daily redemption.

Hybrid and asset-allocator long-short strategies are generally structured as interval funds, with redemption windows as infrequent as twice a week, and in some cases monthly. Debt long-short strategies commonly offer weekly redemption windows. AMCs may also impose a redemption notice period of up to 15 working days, and units of close-ended and interval SIFs are mandatorily listed on recognised stock exchanges, providing investors an alternative secondary-market exit route where direct redemption is restricted. This graduated liquidity structure, tighter than the largely daily-redemption norm for conventional open-ended mutual funds, is designed to prevent forced, disorderly unwinding of complex long-short and derivative positions under redemption pressure, and to protect remaining unit-holders from the transaction costs that hurried liquidation would impose. 

Valuation of SIF portfolios follows the “Principles of Fair Valuation” prescribed under the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which require that investments be valued in good faith, in a true and fair manner, so as to reflect realisable value and ensure equitable treatment between incoming, outgoing and existing investors. In practice, this means NAV is computed daily, with listed and actively traded securities marked to market using observable prices.

For illiquid or thinly traded instruments, including unlisted debt, stressed or restructuring-linked holdings, and derivative positions without an active market, AMCs must apply approved fair-valuation models (such as discounted cash flow or comparable-instrument approaches), with the rationale documented and preserved for audit. Short positions and derivative exposures are valued and monitored on a mark-to-market basis, consistent with the exposure-calculation methodology applied to hedging and non-hedging derivative positions under the mutual-fund framework. This valuation discipline is particularly significant for SIFs given their permitted use of unhedged short positions and less liquid instruments, where mispricing could distort NAV and create inequities between investors entering and exiting the fund at different points in time.

Monitoring has also evolved with the product. SEBI’s January 2026 compliance-reporting framework brought SIF reporting into a standardised format, requiring the compliance architecture applicable to mutual funds to extend to SIFs. This is important because a more flexible investment product requires stronger monitoring rather than weaker oversight (SEBI, 2026).

Performance

Because SIFs became operational only from April 2025, a conventional five-year performance assessment is not yet possible. The appropriate approach is therefore to evaluate the product’s initial market adoption, asset growth, investor participation and diversification of strategies.

The available data indicate rapid expansion during the first ten months of operation. In October 2025, there were four SIF schemes, 10,212 folios and ₹2,010.44 crore in net assets under management. By July 2026, the number had increased to 30 schemes, 94,447 folios and ₹23,177.31 crore in net AUM (AMFI, 2025–2026).

Source: Association of Mutual Funds in India (AMFI), SIF Monthly Reports, October 2025 and July 2026.

This headline growth, however, should be read with an important caveat. A meaningful share of month-on-month AUM expansion has coincided with the launch of new schemes rather than purely organic inflows into existing strategies. For instance, in February 2026, three newly launched strategies alone mobilised ₹1,352 crore, accounting for roughly 43% of that month’s total SIF inflow; June and July 2026 similarly saw six and three new-scheme launches respectively, mobilising ₹1,740 crore and ₹789 crore.

Initial seeding of new schemes, often drawing on existing distribution relationships and, in some cases, on assets shifted from related AMC strategies or sponsor-linked capital, can inflate early-stage AUM figures relative to genuinely new retail or HNI money entering the category. AUM also moves with market valuation, not only with flows: in periods of positive equity performance, a portion of the reported AUM increase reflects mark-to-market gains rather than fresh subscriptions. The growth trajectory should therefore be read as a composite of new-product mobilisation, valuation effects and organic inflows, rather than purely the latter, and future assessments should isolate net flows from launch-driven and valuation-driven effects to gauge true organic adoption. 

The expansion has not been uniform across strategies. Hybrid strategies have emerged as the largest segment. By July 2026, hybrid SIFs accounted for ₹16,523.65 crore, or approximately 71% of total SIF net AUM. Equity-oriented strategies accounted for ₹6,653.66 crore, while no debt-oriented SIF strategy had yet recorded AUM. This suggests that early investor demand has been concentrated in products combining asset allocation with long-short flexibility rather than pure debt strategies (AMFI, 2026).

Source: AMFI, SIF Monthly Report, July 2026.

The complete absence of debt-oriented SIF launches and AUM through July 2026 is itself a notable feature of early adoption, and several factors plausibly explain it. First, conventional debt mutual funds already offer relatively efficient, familiar exposure to fixed income for most investors, and post the 2023 removal of indexation benefits on debt mutual fund LTCG, investors have shown limited appetite for adding further structural complexity, such as unhedged short positions via debt derivatives,  to an asset class they typically hold for capital preservation and stability rather than tactical return generation.

Second, unhedged short-selling in debt derivatives requires liquid, well-developed interest-rate derivative markets, which remain comparatively shallow in India relative to equity derivatives, constraining AMCs’ ability to design and confidently market such strategies. Third, HNI and sophisticated investor demand for downside protection has, so far, been channelled through hybrid SIFs, which already blend a debt component with equity long-short exposure, arguably satisfying much of the appetite that a standalone debt long-short product might otherwise address. Taken together, these factors suggest that the absence of debt SIF uptake reflects limited product-market fit at this stage rather than a structural flaw in the framework, though this may change as debt derivative markets deepen and AMCs experiment with debt-oriented launches. 

The growth trajectory also indicates continued product launches. During July 2026, three new schemes with completed allotments mobilised ₹789 crore. During June, six new schemes mobilised ₹1,740 crore. The expansion therefore reflects both increasing assets in existing products and the entry of new investment strategies (AMFI, 2026).

An important regulatory development occurred in November 2025, when SEBI decided that, from January 1, 2026, investments by mutual funds and SIFs in REITs would be treated as equity-related instruments, while InvITs would continue to be treated as hybrid instruments. This change was intended to facilitate greater participation in REITs while maintaining the applicable investment restrictions (SEBI, 2025).

No separate Union Budget allocation is associated with the SIF framework. This is because SIF is a market-regulatory framework administered through SEBI, rather than a government expenditure programme or subsidy scheme. Its implementation therefore relies primarily on regulatory supervision and the infrastructure of AMCs, trustees, exchanges, clearing corporations, depositories and other market intermediaries rather than direct budgetary funding (SEBI, 2025).

Impact

The initial evidence suggests that the framework has successfully created a new segment within India’s regulated asset-management industry. Its most visible achievement is rapid market adoption: within ten months, SIFs expanded from four schemes and approximately ₹2,010 crore in AUM to 30 schemes and more than ₹23,000 crore in AUM. The growth in folios from 10,212 to 94,447 also indicates that participation has expanded considerably rather than being limited to a handful of large investors (AMFI, 2025–2026).

The product appears to be meeting its intended objective of filling a space between conventional mutual funds and PMS. Long-short strategies and controlled derivative exposure provide investment managers with tools that are generally unavailable in traditional long-only mutual-fund categories. At the same time, investors receive these strategies through a pooled and regulated structure rather than directly managing derivatives or securities themselves (SEBI, 2025).This impact, however, is uneven across strategies.

The heavy tilt toward hybrid products means the framework’s differentiated tools, active shorting, sector rotation, pure debt long-short, remain comparatively under-tested in practice, so the market’s verdict so far speaks more to hybrid design than to the SIF framework as a whole. The permitted use of unhedged shorts also introduces systemic considerations: short positions in mid- and small-cap derivatives are vulnerable to squeezes during volatile cycles, and exchange-traded derivative exposure carries counterparty and margin risk that can compound losses at the worst possible time.  

However, early AUM growth should not automatically be interpreted as evidence of superior investment performance. The framework is too recent to establish whether SIFs consistently generate risk-adjusted returns superior to conventional mutual funds or whether investors are simply responding to the novelty and flexibility of the product. Furthermore, the concentration of AUM in hybrid strategies and the absence of debt-oriented strategies suggest that investor preferences are still evolving (AMFI, 2026).

The framework has nevertheless demonstrated regulatory adaptability. The introduction of minimum-threshold monitoring, standardised compliance reporting and subsequent changes affecting REIT investments indicate that SEBI has been refining the architecture as implementation progresses (SEBI, 2025–2026). One risk to this adaptability, though, is commercial: higher-complexity, higher-fee SIF products may incentivise distributors to prioritise sales volume over rigorous risk profiling, a tension the framework’s long-term credibility will depend on managing. 

Emerging Issues

• Investor suitability: The ₹10 lakh threshold filters out much of the retail market, but a high minimum investment does not necessarily ensure that investors fully understand derivatives, leverage and short-selling risks. Strong suitability and risk-disclosure mechanisms will therefore remain essential.
• Complexity and risk: The ability to undertake up to 25% unhedged short exposure gives fund managers greater flexibility but also increases the potential for losses during adverse market movements. SEBI’s own scenario-analysis framework illustrates that portfolio outcomes can differ substantially depending on the direction and composition of short positions (SEBI, 2026).
• Concentration in hybrid products: By July 2026, roughly 71% of SIF AUM was concentrated in hybrid strategies. While this reflects investor demand, it also indicates that the broader SIF ecosystem has not yet diversified evenly across all permitted strategy categories (AMFI, 2026).
• Limited performance history: Since the framework became operational only in 2025, there is insufficient evidence to judge long-term risk-adjusted returns, persistence of performance or behaviour across complete market cycles.
• Distribution and investor education: SEBI introduced dedicated certification requirements for distribution of SIFs in July 2026. This reflects the need for distributors to possess product-specific knowledge as SIF strategies become more complex (SEBI, 2026).

Way Forward

The way forward for SIFs should focus on strengthening suitability-based distribution, ensuring that investment decisions are based not only on the ₹10 lakh minimum threshold but also on an investor’s risk capacity and understanding of complex strategies. Product-specific risk assessments and clearer disclosures regarding derivatives, short positions and potential losses can strengthen investor protection. 

At the same time, performance transparency should be improved as SIFs develop a longer track record, with standardised reporting of returns, benchmarks, volatility, drawdowns and risk-adjusted performance to help investors assess whether these funds are delivering genuine diversification and superior risk-adjusted returns. SEBI should also continue to monitor concentration risks across strategies, issuers and sectors, particularly if rapid growth results in crowded positions. Greater emphasis should be placed on investor education, with accessible material explaining long-short strategies, derivatives, leverage, liquidity and downside risks so that investor sophistication reflects financial understanding as well as wealth.

SEBI could also consider mandating periodic stress testing and liquidity-coverage requirements modeled on derivative black-swan scenarios, to ensure SIFs can meet redemption demands even under extreme, correlated market shocks. Standardised monthly factsheets, clearly disclosing gross versus net exposure and long versus short allocations, would further help end-investors track actual risk levels rather than relying on strategy labels alone. 

Over the longer term, SEBI and the industry should develop a comprehensive evidence base covering performance, investor participation, redemptions, complaints and risk indicators, enabling an objective assessment of whether SIFs are effectively filling the gap between mutual funds and PMS. Finally, the regulatory framework should maintain flexibility while strengthening safeguards, allowing innovation and new investment strategies to develop alongside proportionate disclosure requirements, risk controls and supervisory mechanisms.

Overall, the SIF framework represents an important shift in India’s asset-management regulation: instead of creating an entirely separate investment ecosystem, SEBI has attempted to build a more sophisticated layer within the existing mutual-fund architecture. Its early growth is significant, but the real test will be whether SIFs can deliver differentiated, risk-adjusted investment outcomes without weakening investor protection. The next few years, particularly through a complete market cycle, will therefore be more important than the impressive initial growth figures in determining whether SIFs become a durable new asset class in India.

References 

About the Contributor

Sruti Halder is pursuing an MSc in Economics at the Gokhale Institute of Politics and Economics. She is committed to leveraging data-driven research and evidence-based policymaking to promote inclusive and sustainable socio-economic development. 

Acknowledgment

I am writing to express my sincere gratitude to IMPRI (Impact and Policy Research Institute) for providing me with the opportunity to prepare this policy update article and for fostering a rigorous learning environment that connects research with public policy practice.

Disclaimer

All views expressed in the article belong solely to the author and do not necessarily represent the views or policies of the organisation.

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