What SIFs Change For Anyone Investing Beyond the Top 100

Specialised Investment Funds (SIFs) are a new class of investment products introduced under the mutual fund framework. While they follow the same regulatory structure as mutual funds, they allow fund managers greater flexibility in portfolio construction. One key feature of SIFs is the ability to combine long and short positions, which can help to manage risk in volatile market conditions.

The ‘Equity Ex-Top 100 Long-Short’ is one of the equity-oriented categories that SIFs are allowed to offer. It’s a mid- and small-cap investment strategy, where stock positions can be hedged and unhedged to manage the risks and protect downside. The structure allows fund managers to actively adjust exposure based on market conditions, valuations, and liquidity trends. This flexibility also enables quicker portfolio responses during sudden market disruptions or global risk events.

Mid- and small-caps offer the potential to outperform as several of these companies are in an early or middle stage of growth cycle and operate in expanding sectors. Over time, some of these companies have the potential to develop into large, established businesses. This segment also benefits from increasing institutional and retail participation, which has improved market depth and liquidity in this market segment.

But unlike large-caps, mid- and small-caps tend to be more volatile. They tend to perform well during periods of strong economic growth – even outperform large-caps – but can also see sharper corrections when market sentiment turns negative. For investors, this makes risk management as important as return generation. Because of this, investing in mid- and small-caps requires strong stock selection and disciplined risk controls. Investors also need patience and a long-term perspective to navigate interim market fluctuations.

A long–short strategy allows the fund manager to take positive positions in selected stocks while also taking limited negative positions in others. The long side of the portfolio is built through bottom-up research. Managers focus on companies with market leadership potential, improving balance sheets, favourable cost structures, stable cash flows, reasonable valuations, and consistent earnings growth. These are businesses that have the potential to deliver steady returns over time. The managers also look for opportunities within sectors, seeing positive tailwinds.

The short side is implemented through derivative instruments. It is used selectively and remains capped under regulations, typically at around 25% of the portfolio. Its purpose is not just to drive returns on its own, but also to manage risk. By taking short positions in stocks that appear overvalued or weak, the portfolio can reduce the impact of market corrections. In addition to long and short positions, managers may use other derivative-based strategies such as covered calls, arbitrage trades, and short straddle and strangle strategies. When used efficiently, they can help smooth returns across different market phases and generate additional income during sideways markets.

An Ex-Top 100 long–short strategy may not always deliver the highest returns during strong bull markets. However, its focus is on delivering better risk-adjusted performance over a full market cycle, with lower volatility. By limiting downside during weak periods, the strategy aims to cushion portfolios and support long-term compounding.

This approach recognises a common challenge when it comes to mid- and small-cap investing. Many investors exit during sharp market falls, often locking in losses. Managing volatility, therefore, becomes critical in sustaining long-term returns.

In an environment where market sentiment can change quickly, Ex-Top 100 long–short strategies offer a structured way to access growth opportunities beyond large-cap stocks, while managing the risks.

Disclaimer: This article is written by Prasad Sangam, Director of Acornia Investment Services Private Limited.

The views expressed are his own. This is partner content and not an Outlook Money editorial feature. Outlook Money does not provide investment advice or endorse any products or services mentioned.

Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature