Over the past few years, mutual fund investments have surged as more people have entered the stock market. But investors seeking more sophisticated products typically had only portfolio management services (PMS), or alternative investment funds (AIFs) as options. The high entry barriers—`50 lakh for PMS and `1 crore for AIFs—meant they were largely limited to high-net-worth individuals (HNIs).Things changed when the Securities and Exchange Board of India (Sebi) introduced specialised investment funds (SIF) effective April 1, 2025. The idea was to bridge the gap between mutual funds and PMS/AIFs by offering investors greater portfolio flexibility.In less than a year since the first SIF was launched, the category has seen good traction, with assets under management rising each passing month, surprising even the most optimistic fund managers.An SIF is a Sebi-regulated pooled investment product, like a mutual fund, but with more flexibility. Fund managers can offer long-short equity derivative strategies, multi-asset allocation, and commodity derivatives. It could be a good option for experienced investors seeking regulatory safeguards of mutual funds but flexibility of PMS and AIFs at a far lower entry barrier. The key advantage is their flexibility, Mittul Kalawadia, Senior Fund Manager at ICICI Prudential AMC, tells Business Today.SIFs are allowed to invest in derivatives whereas traditional mutual funds can do so in a limited way. Derivatives act as a hedge by offsetting potential losses in an asset through an opposite position. This can help SIFs limit losses, particularly during prolonged market downturns. Rising Investor InterestQSIF Equity Long–Short Fund was India’s first SIF, launched in September 2025. As of June 2026, there were 27 SIF schemes in the market, with the largest number of funds (nine) in two categories—equity long-short and hybrid long-short. The net assets under management (AUM) of the SIF segment stood at `17,858 crore, up 29% from `13,814 crore in May 2026, according to data from the Association of Mutual Funds of India (AMFI).The response to SIFs reflects the evolution of the Indian investor, who has become far more aware of asset allocation, risk management and need for differentiated return streams, says Radhika Gupta, MD and CEO of Edelweiss Mutual Fund.The asset manager runs Altiva SIF, which currently offers two schemes—the Equity Ex-Top 100 Long-Short Fund and the Hybrid Long-Short Fund.What excites us about SIFs is that they democratise access to strategies that were historically available only through more exclusive structures.-Radhika Gupta,, MD and CEO, Edelweiss Mutual Fund“What excites us about SIFs is that they democratise access to strategies that were historically available only through more exclusive structures. Investors today are not just chasing returns; they are looking for better portfolio outcomes, diversification and resilience across market cycles,” Gupta tells BT.By taking derivative positions, SIFs seek to protect portfolios from downside risks, particularly during bear markets, while retaining some upside potential. As a result, they are expected to be less volatile and deliver steadier, risk-adjusted returns over a market cycle than conventional mutual funds.Equity markets have been volatile this year amid the West Asia conflict. SIFs, with their ability to take derivative positions, have delivered better outcomes than some mutual funds, and that may have helped attract more investors, according to Venkat Chalasani, the CEO of the Association of Mutual Funds in India (AMFI). But the same strategies that protect portfolios in falling markets can also cap upside during prolonged bull runs. “Post launch, market volatility was extremely high. Taking naked derivative positions helped these people give reasonably better results when compared to what we are getting in the mutual fund space. That is attracting some good flows into the market,” Chalasani tells BT. Early adopters have largely been experienced investors and HNIs rather than investors diversifying away from mutual funds.Sebi has laid down strict eligibility criteria for launching SIFs. A mutual fund can launch an SIF only if it has been in operation for at least three years and has maintained an average AUM of at least `10,000 crore over the preceding three years. Alternatively, fund houses can qualify by appointing a chief investment officer and an additional fund manager meeting Sebi’s eligibility criteria.Taking derivative positions, helped these people invest more and then give reasonably better results when compared to what we are getting in the mutual fund space.-Venkat Chalasani, CEO, Association of Mutual Funds in IndiaThe AdvantagesSIFs have several things going for them. They follow the same expense structure as mutual funds. The taxation structure is also similar, so investors are taxed only when they redeem their units. If redeemed after one year, long-term capital gains are taxed at 12.5%. This is an advantage over PMS, where investors are taxed whenever the fund manager executes a trade. PMS and AIFs also often charge performance fees.“On the one hand, investors have been looking for differentiated strategies. On the other hand, we have had a year and a half of markets not going up. There has been volatility. So, that creates a good environment for a strategy like the SIF. The fact that it has been structured to be offered to investors inside the mutual fund wrapper, which is really well understood, there is transparency, there’s governance around it, and there is tax efficiency, I think that’s a win-win,” says Sid Swaminathan, the MD and CEO of Jio BlackRock Asset Management.Swaminathan believes India has similar potential as investor preferences evolve. In the US, strategies comparable to SIFs are offered through alternative mutual funds or liquid alternatives, which bring hedge fund-like investment approaches to retail investors. Like SIFs, they can take both long and short positions. According to the Deloitte Centre for Financial Services, alternative funds, including those targeted at retail investors, could manage $4.1 trillion in assets by the end of this decade.Arun Patel, founder and partner of Arunasset Investment Services, says SIFs are an interesting category, and the rapid rise in AUM indicates strong demand among the investor segment they are designed for. However, investors should not confuse rapid asset gathering with a proven track record.Experts say while some money is shifting from PMSs and AIFs, experienced mutual fund investors who have built sizeable portfolios are also among the early adopters of SIFs.“As things stand, no SIF has a one-year live record. I would prefer to wait a little longer to see how AMCs use this additional flexibility across different market conditions before committing meaningful money,” says Patel.However, there is a trade-off. In a sharply rising market, the same hedge can cap the upside. “So, SIFs should be judged on risk-adjusted returns over a full cycle rather than short-term performance,” he says.Anant Ladha, founder of investment platform Invest Aaj for Kal, says a category like the active asset allocator long-short fund, which invests across equity, debt, commodity derivatives as well as REITs, could suit investors looking for steady and consistent returns over time.“Particularly, if you are a defensive investor who would be very happy with, say, 10–11% returns, and that too consistent, the active asset allocator category could be good for you. Also, when multi-asset funds perform, like they did due to a rally in gold and silver in the recent past, these funds could even beat equity returns,” he says.Distribution ChallengesOne challenge that may act as a speed bump in the rapid growth of SIFs in the near term is distribution. Mutual fund distributors who want to also sell SIFs must clear a stringent certification process. It is estimated that there are currently around 7,000 SIF distributors, compared with around two lakh distributors in the mutual fund industry.Chalasani says the current distributor network is sufficient for the present size of the market and the number is growing every month. He agrees that the network needs to expand further and says discussions are on with Sebi on that front.While distributor availability is currently seen as the biggest constraint to the growth of the category, industry participants believe investor awareness will improve as more fund houses launch SIFs. “We are trying to see if there is a way in which the NISM (National Institute of Securities Markets) test that is being done can be focused and the syllabus is related to only particular strategies rather than covering all other products. The test, for instance, even includes forex derivatives. We have requested that things that are not essential to become a distributor of SIF be removed,” says Chalasani. Sebi and NISM are working together to bring out a combined mutual fund–SIF distributor certification examination, which will be a single certification for distributors intending to distribute both mutual fund and SIF products, Amarjeet Singh, whole-time member of Sebi, said in an industry conference earlier this month.The SIF industry is still a fraction of the size of the mutual fund industry. The net AUM of the mutual fund industry stood at `81.58 lakh crore as of May 31, 2026, with equity funds alone recording inflows of `22,908 crore in May. While these inflows have been driven largely by retail investors through SIPs and lump-sum investments, industry participants expect SIFs to attract a mix of money shifting from PMSs and AIFs, as well as allocations from experienced mutual fund investors seeking more sophisticated investment strategies.“If you look at developed investment markets globally, investors have access to a much wider spectrum of portfolio solutions. India is moving in that direction as investor sophistication increases and financial assets continue to grow,” says Gupta of Edelweiss MF.@TheNachiket