The first signs of Specialised Investment Funds (SIF) are finally here for all to see. The newly-proposed investment vehicle, which requires a minimum ticket of ₹10 lakh, will roll out with a resounding thump. Asset management companies are known to be giving final touches to their products, being billed as differentiated solutions across equity, debt and hybrid categories.

To be positioned between a mutual fund (a classic retail option that normally has a low entry barrier of ₹500) and PMS (Portfolio Management Scheme, which requires at least ₹50 lakh), these will no doubt cater to a whole new genre of investors.

At least one mid-sized but ambitious asset management outfit has already announced its first launch. This, it has declared, marks an “early strategic entry” aimed at a “promising and fast-evolving” space. In fact, the first SIF roll-outs will play a pioneering yet purposeful role in a competitive realm. What can investors expect from an SIF? This article, aimed at revealing critical details of the new beast in the jungle, will indeed splice its DNA.

Before I proceed, let me make it absolutely clear that investors who wish to explore SIFs must familiarise themselves with the probable challenges — relatively higher risks, including potential loss. Such loss may impact one’s capital as well. Liquidity risk too is not ruled out. And above all, there will be market volatility to contend with.

What can investors expect?

The securities regulator has pinpointed a number of disclosures, all of which are relevant for investors. The “Investment Strategy Information Document” for SIFs needs an in-depth study. Here are a five major issues:

• Name and type of investment strategy that will be followed
• Product labelling and risk band
• Investment objectives
• Liquidity and listing
• Benchmark

Investors must be told about the very nature of the SIF. Whether or not it is close-end or open-end structure (or perhaps positioned as an ‘interval’ scheme) must be disclosed. All debt-oriented strategies must mention the PRC or Potential Risk Class, which has been defined by the regulatory agency. Those who are familiar with debt funds will recall the ‘PRC Matrix’ in this context.

Risk mitigation

Not surprisingly, a number of disclosures have been made essential on the risk front. Investors must seek answers to the following questions:

• Where will the SIF invest keeping in view its mandate?
• What are the investment restrictions that apply to it?
• What are the maximum and minimum allocation limits?
• What are the liquidity provisions -- especially those pertaining to listing, redemption or repurchase?

It may be mentioned here that investors must have the right to access periodic disclosures. They will typically need (within specific timelines) semi-annual or annual details. And it goes without saying that portfolio disclosures will be absolutely necessary. Anyone investing in an SIF must have the right to know where his allocation is being utilised. Full transparency in such matters is non-negotiable.

The long-short angle

SIFs are expected to offer a mix of options for the new-age investors. There will be diversification across various classes of assets, which is well within the range of ordinary expectations. In addition, there will be long-short strategies on offer.

The fund in question can take a long position to hedge its portfolio. Adopting such a tactic with outperforming stocks (and taking short positions for underperforming stocks) is seen as a functional, efficient strategy for discerning investors.

The overall idea is to optimise returns — a portfolio with such a strategy will gain in the context of advances and declines in the market. Hedge funds, incidentally, are known to be using these tactics in order to potentially enhance their profits.

Such sharp stratagem notwithstanding, I believe not all investors should have a go at SIFs. In other words, anyone with ₹10 lakh to spare should not necessarily include this in his basket.

The right mix of appetite and need — an inalienable binary for most of us — is necessary in the first place. If you are not aware of all the aspects of SIF, or worse, not conversant with its risks, you need to stay away from it. Perhaps plain-vanilla mutual funds are what you should acquire. However, if you are wealthy enough to spare the relatively higher minimum amount, and not feeling queasy about the risks, an SIF may bring a breath of fresh air.

Just make sure you choose the right professionals to assist you. The asset management company (that is, the product manufacturer) and the intermediary (that is, the distributor) must be fully compliant, both must be qualified for the roles they are required to play. They must meet minimum standards, and together, both must raise the bar for performance and service.

The writer is director of Wishlist Capital