Long Short Hybrid SIFs Suitable For Retirees Seeking Capital Protection With Liquidity: DP Singh, SBI Mutual Funds

SIFs have come about for a very specific reason. Regulators introduced this evolving asset class very clearly with a minimum investment size of Rs 10 lakh.

To give some background, when markets were rising and people were making money, many investors started moving towards portfolio management services (PMS), which, we know, can sometimes be loosely regulated compared to mutual funds. As surplus in the hands of investors grew, many unknowingly entered categories where small investors did not enjoy the same regulatory protection as in mutual funds.

At that point, regulators examined why PMS was attracting money. They realised that certain practices in distribution were restrictive and that there was a demand for a product between PMS and mutual funds. So SIF was conceptualised as a category somewhere between PMS and traditional mutual funds. The Rs 10 lakh minimum ensures that even a middle-class employee receiving retirement benefits can participate, but it is not positioned as a mass retail product.

The objective is to meet the needs of investors who want relatively safer, tax-efficient returns, potentially better than fixed-income products, while also benefiting from equity market participation and compounding. SIF is essentially for investors who do not want a super-aggressive product but want relatively safer returns with equity efficiency.

When we say “long-short”, it refers to taking positions in the market — going long on stocks you expect to perform well and shorting stocks using derivatives. Up to 25 per cent naked derivative positions are permitted. We can use derivatives within limits. This means we are taking calibrated higher risk to optimise returns.

You don’t make money when everything is smooth; you have to take a market view. When we launched our long-short strategy, we back-tested it over the past 10 years. On a point-to-point basis, such a strategy could have delivered around eight to 12 per cent returns if held for more than 15 months.

So it is very clear, if someone wants to invest in long short hybrid SIF, especially in the long-short category, the minimum holding period should ideally be 15-18 months. The expected return could be around two per cent higher than fixed-income products, and taxation is treated as equity taxation, which makes it attractive.

Definitely we see it as a complementary product. Even today, out of a population of 1.40-1.50 billion, only about 50-60 million people invest in mutual funds. There is a huge untapped population.

SIF is more like a complementary product to conservative hybrid funds. Through the use of derivatives and certain strategies, it can potentially generate 100-200 basis points (bps) more than traditional options, and that too with equity taxation.

This (SIF) is best suited for people who have a time horizon of more than one year and want tax-efficient internal compounding. It is suitable for retirees or corporates who want to protect capital but are comfortable keeping liquidity invested for at least 12-15 months. If someone has a very short horizon, then liquid funds or arbitrage funds may be more appropriate. But for those with a 12-15 month horizon, this can be part of the overall portfolio.

If someone has Rs 100, they should not put all Rs 100 into SIFs. Maybe 35-40 per cent can remain in higher-risk assets, and 50-60 per cent into a category which may not give me super returns but offers relatively stable, tax-efficient returns, rather than paying 35-40 per cent tax, that too without any cash flow.

If someone has surplus additional money, that additional money can definitely be allocated to a SIF.

In fact, in the hybrid SIF category across five fund houses, more than 50 per cent of the money has come through the direct route — largely from individuals investing Rs 10 lakh, Rs 20 lakh, Rs 30 lakh, or even Rs 50 lakh. This category has the potential to grow significantly.

First, one must remember that switching from existing funds may trigger taxation, 12.50 per cent plus surcharge and cess on gains. That must be factored in.

If your goal has been met and you want to reduce risk, then yes, you may consider moving part of the portfolio. But don’t switch just because SIF is new.

If someone has surplus additional money, that additional money can definitely be allocated to hybrid SIF. For example, someone with only fixed deposits may consider allocating 25-30 per cent to SIF. On the other hand, someone heavily invested in equity and nearing retirement may also shift 25-30 per cent into SIF to reduce risk.

On the other hand, someone heavily invested in equity and nearing retirement may also shift 25-30 per cent into hybrid SIF to reduce risk.

It depends on the individual. There is no one-size-fits-all solution.

Regular customers investing in short-term or hybrid funds may not fully understand derivatives, and we do not aggressively push long short hybrid SIF to them. However, through the wealth channel within banks, we have seen traction.

It has only been three months, and the industry AUM is around Rs 6,000 crore, of which we manage about Rs 3,200 crore. I believe this industry can grow many-fold, possibly to Rs 5-6 lakh crore over the next couple of years.

Yes, definitely as part of the portfolio. If someone has a retirement corpus of Rs 1 crore, allocating 20-25 per cent to SIF makes sense. It is relatively safer, liquid, and tax-efficient. The key principle is minimising annual cash outflow due to taxes. Portfolios can be structured in a way that tax impact is optimised.

Yes, I do, though the allocation is small. I do not want to reduce my overall risk significantly because I have sufficient equity exposure. But additional money, yes, I do allocate to SIF. Also, as per Securities and Exchange Board of India (Sebi) regulations, we are required to invest in our own funds.

Distribution of SIF requires additional certification beyond standard mutual fund certification. How has the response been from distributors?

Three months ago, we had around 1,200 certified distributors. Today, that number is above 4,000-4,500. The exam is a bit tricky, so it takes time, but progress has been strong. By the end of the year, we expect around 6,000-7,000 certified distributors across the country.

Derivatives have a bad reputation largely because many retail investors trade without adequate knowledge. As Sebi data shows, more than 90 per cent of such participants lose money.

But mutual funds use derivatives primarily for hedging and structured strategies, not speculation. We are not targeting speculative investors. Mutual funds are allowed limited derivative exposure, capped at 25 per cent, within a strict regulatory framework. This ensures fund managers do not take extraordinary risks that could harm investors.

That is precisely why long short hybrid SIF exists within regulation, unlike loosely regulated PMS structures. Derivatives, when used prudently, are tools for liquidity management and value creation. SIFs, in my view, have a long way to go.