Unlike PMS—which manage portfolios individually—SIFs permit fund houses to take short positions through derivatives, aligning Indian products with global trends where tactical and hedged strategies are gaining popularity.
Under the SIF framework, Sebi has capped maximum short exposure at 25%, but has not mandated a minimum. This leaves room for fund houses to launch ‘long-short’ funds that, in practice, take no short exposure—essentially running like traditional long-only products.
However, the question is not whether these tools exist—but whether they will be actively and effectively used, or if the long-short promise will be diluted in execution.
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Key questions
Though forward looking, the SIF Framework raises key questions:
- Do fund managers have the conviction and capability to short effectively in India’s growing market?
- If Cat-III Alternative Investment Funds (AIFs) haven’t embraced shorting despite years of flexibility, will SIFs fare any better?
- Will SIFs be meaningfully different from long-only funds?
- Are there enough distributors for selling SIFs?
- Are Indian fund houses truly prepared—technically and institutionally—to navigate the risks of complex derivative strategies within SIFs?
Where is the shorting skillset?
India’s capital markets have yet to foster a strong short-selling culture. Since liberalisation, only a handful of notable short-sellers have emerged, and most fund managers today remain firmly long-biased. Shorting requires deep conviction, discipline, and robust risk management.
Unlike long-only strategies, where downside is limited to 100%, short positions can lead to theoretically unlimited losses if the stock price rises sharply. This asymmetry makes shorting inherently more complex and riskier.
Unless these capabilities mature, SIFs risk becoming an underutilised regulatory innovation—launched in form, but not in spirit.
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Cat III AIFs — an eye opener?
Even within Category III AIFs—which have long had the regulatory flexibility to run long-short strategies—most fund houses remain firmly long-biased. This suggests a lack of conviction, capability, or both when it comes to executing true short strategies.
In practice, only a small number of funds in this space meaningfully pursue shorting. Many Category III AIFs are essentially long-only vehicles structured to replicate PMS-like flexibility in a pooled format. Their appeal often lies in avoiding the administrative complexity of managing individual PMS accounts, rather than leveraging long-short opportunities.
As of 31 March 2024, just 258 of the 1,283 Sebi-registered AIFs—or roughly 20%—belonged to Category III, the only AIF category permitted to short via derivatives. That limited traction, even in an institutionalised and relatively flexible space, raises a crucial question: will SIFs succeed where Cat III AIFs have largely stalled, unless fund managers develop genuine conviction in shorting?
Are sellers ready?
One major bottleneck is distribution. Most mutual fund distributors are not certified to handle derivatives, severely limiting the ability of asset management companies (AMCs) to gather capital in SIFs.
To distribute SIFs, intermediaries must clear both the NISM Series XIII: Common Derivatives Certification and Series V-A: Mutual Fund Distributors exams—a bar that many have yet to meet.
Without a sizeable pool of certified and trained intermediaries, these funds risk being niche products, accessible to only a narrow investor base.
Are fund houses prepared?
Sebi’s finding that over 90% of retail traders in equity derivatives lose money, raises questions about the market’s preparedness for complex, derivative-heavy products like SIFs.
SIFs are designed to allow long-short strategies, therefore their success depends on sound risk management, skilled fund managers, and investor awareness. Without these, there’s a real risk that SIFs could be misused, remain long-only in practice, or worse—further erode trust in the market they aim to deepen.
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Policy prescription
Without a significant shift in market mindset, distribution capability, and shorting skill, SIFs may struggle to scale despite their conceptual strength. To prevent long-only funds masquerading as SIFs, it would be better if certain ‘minimum’ threshold (say 10%-20%) for short positions is compulsorily required for SIFs instead of current requirements which mandates a short position of ‘max’ 25% (fund manager can sit at zero short position and effectively run a long only fund in the name of SIF).
To conclude, while SIFs offer strong structural benefits—such as the flexibility to hedge, take contrarian positions, and navigate volatile markets—their practical adoption may remain limited. Without the right ecosystem, SIFs could eventually be perceived as no different from existing PMS or AIF offerings, despite their differentiated design.
Kunj Bansal is general manager and Rasmeet Kohli, is senior assistant general manager, at the National Institute of Securities Markets. Views are personal.