Specialized Mutual Funds: Sebi sets a minimum threshold of ₹10 lakh for investors

The Indian market regulator has a minimum investment threshold of ₹10 lakh for investments in specialty mutual funds (SIF), a new asset class that allows mutual funds to offer sophisticated investment strategies to investors.

However, accredited investors are exempt from this requirement, under the Securities and Exchange Board of India’s framework for SIFs introduced on Tuesday.

Investment funds can launch investment strategies in open-end, close-end and interval structures for specialist investment funds, allowing them to target a broader group of investors with varying risk appetites and investment horizons.

For investors, SIFs offer the opportunity to diversify their portfolios while navigating a structured and transparent investment framework.

Launching new investment strategies under SIFs will follow the same procedure as mutual fund schemes. Strategies can adopt open-end, close-end or interval structures, with clear explanations of subscription and redemption frequency. Fees and expenses for these strategies must comply with mutual fund regulations.

Minimize risks

To maintain risk control, Sebi has placed strict limits on a SIF’s exposure to individual issuers, companies and sectors.

For debt instruments, no more than 20% of the net asset value (NAV) of a SIF may be invested in securities issued by a single issuer with an investment grade rating. This limit may be increased to 25% with the approval of a fund’s board of directors and asset management committee. Currently, mutual funds cannot invest more than 10% in a single debt instrument.

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Similarly, stock investments face specific limits. No strategy under the SIF umbrella can invest more than 10% of its net asset value in equities or equity-related instruments of a single company. In addition, ownership of a voting company’s paid-up capital is limited to 15% for all SIF strategies. For investment funds, this limit is limited to 10% of one company.

This is to ensure that SIFs do not overly concentrate their positions in a single entity, thereby minimizing systemic risks.

Ensuring awareness among investors

To ensure transparency and investor awareness, Sebi has emphasized the need for a separate identity for SIFs, apart from other mutual funds.

Fund managers overseeing SIFs must hold relevant certifications from the National Institute of Securities Markets as specified by Sebi. In addition, asset managers must adhere to Sebi’s provisions on branding, advertising, disclaimers and website maintenance.

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Sebi has also mandated extensive disclosures in the offer documents of SIFs. These documents should provide sufficient information to help investors make informed decisions, while also highlighting the risky nature of these funds. Additionally, SIFs must comply with Sebi’s portfolio disclosure norms, ensuring transparency in reporting formats and timelines.

Reits and InvITs

Sebi also introduced restrictions on investments in real estate investment trusts (Reits) and infrastructure investment trusts (InvITs).

Total investments in Reits and InvITs may not exceed 20% of their net asset value, with a maximum of 10% per issuer. In addition, total ownership of units issued by a single issuer across all strategies may not exceed 20%. However, index funds and sector-specific schemes are exempt from these limits.

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