The category allows fund managers greater flexibility, including the use of derivatives, hedging strategies and limited short positions. But experts say investors should not view SIFs as “mutual funds with higher returns”.
The product comes with a different risk-return profile and requires a deeper understanding of the strategy, manager capability and portfolio role.
For investors evaluating SIFs, the key question is not whether they can deliver higher returns, but whether the strategy can improve portfolio outcomes through better risk management and diversification.
More flexibility, but also more responsibility
Unlike traditional mutual funds, which largely benefit when markets rise, SIF strategies can use tools such as short positions and tactical allocation to navigate different market conditions.
This flexibility, however, does not automatically make them safer or more profitable.
“The biggest misconception is that SIFs are simply ‘better mutual funds’ capable of delivering hedge fund-like returns with built-in downside protection. They are not,” said Aakash Bansal, Co-Founder & CEO, MIDASX, an AI-powered, multi-asset WealthTech platform.
He said investors need to assess the investment strategy, derivative exposure, liquidity terms, drawdown management and the fund manager’s experience before investing.
Under the regulatory framework, certain SIF strategies can take unhedged short exposure of up to 25% of the net portfolio through derivatives. This gives managers more tools but also increases the importance of execution and risk management.
“SIFs have a regulatory wrapper akin to mutual funds, but the risk is different and higher. Mutual funds are prohibited from taking unhedged short positions, while SIFs can take such positions within regulatory limits,” said P Krishnan, MD & CIO – Equity Asset Management, Spark Asset Management, the equity asset management and alternative investments arm of Spark Capital.
Designed for uncertain markets, not every market cycle
SIFs are expected to find relevance in markets where stock selection, sector rotation and volatility create opportunities.
According to Dharmendra Jain, Co-founder, Ionic Wealth, an Indian AI-driven wealth-tech platform and subsidiary of the publicly listed brokerage firm, Angel One, SIFs can be useful during volatile or range-bound phases because managers have the ability to reduce exposure, hedge positions and take tactical calls.
“In such markets, traditional directional investing can struggle, while SIFs can actively manage risk,” he said.
For example, a long-short strategy can allow a manager to invest in companies with stronger fundamentals while taking positions against stocks that appear expensive or vulnerable.
However, the flexibility works both ways. In a broad-based bull market where most stocks continue to rise, traditional equity funds may have an advantage because they remain fully invested.
“During strong, uninterrupted bull markets, SIFs are likely to underperform long-only equity funds as allocations towards hedges, arbitrage and debt can reduce upside participation,” Jain said.
Manager skill will be a key differentiator
Experts believe the success of SIFs will depend less on the product structure and more on the ability of fund managers to execute complex strategies.
“Greater freedom places more responsibility on the fund manager, making their expertise and track record far more crucial,” said Rohit Tuteja, Co-Founder & CEO, finny.club, a financial advisory platform.
He added that investors should evaluate the fund manager as carefully as the strategy because SIF investing requires skills that may differ from conventional equity fund management.
Krishnan also cautioned that experience in running traditional mutual funds may not always translate into success in alternative strategies.
“The fund managers behind the track record of mutual funds may lack the relevant skill sets in this product category. The style is completely different,” he said.
Hybrid SIFs may see wider adoption initially
Among different SIF categories, hybrid strategies have gained early traction as they combine equity exposure with debt, arbitrage and hedging tools.
“Hybrid SIFs are likely to drive the next phase of growth as they offer managers the broadest toolkit to navigate different market cycles,” said Jain.
Tuteja said hybrid SIFs appeal to investors because they provide a more balanced approach in uncertain markets.
However, equity-focused SIFs could also see demand as investors become more familiar with long-short strategies.
“Equity SIFs are likely to lead the next phase of growth, driven by India’s strong equity investing culture and their ability to generate alpha through active portfolio management,” said Bansal.
Paramdeep Singh, Founder of Long Tail Ventures, a venture capital firm based in New Delhi, said it is still early to identify a category winner.
“Equity-oriented strategies may see faster initial adoption because they are easier for investors to understand, while hybrid and multi-asset SIFs could gain traction over time,” he said.
How much should investors allocate?
Experts view SIFs as a satellite allocation rather than a replacement for an investor’s core portfolio.
Bansal suggested that investors could consider allocating around 5-10% of investible financial assets to SIFs, depending on their risk appetite and financial goals.
Singh suggested a similar approach, with allocations in the range of 5-15% depending on liquidity needs and investment objectives.
Jain said investors could consider a 10-20% allocation, depending on their portfolio structure and risk appetite.
Tuteja, however, highlighted that the ₹10 lakh minimum investment requirement should not be the only factor investors consider.
“If ₹10 lakh is 10% of your portfolio, you need ₹1 crore in financial assets, excluding the house you live in,” he said.
According to him, investors should avoid disrupting a well-diversified portfolio to enter a relatively new category.
