Several leading mutual fund AMCs have expressed interest in launching SIFs. For starters, Edelweiss will launch SIF with a distinct brand. ICICI Pru is also in line, but the first launch of SIF is by Quant, which is launching a long-short fund. In the last few months, since the SIF was permitted by SEBI, there have been a number of reports eulogizing the idea and how it would change the way most people balance risk and returns. It will not be all that simple. A long-short SIF comes with its own set of risk factors.

While the idea of a mid-point between a traditional mutual fund and PMS is quite alluring, there are obvious risks. Today, an investment of ₹10 lakhs is not all that prohibitive and it is very likely that a number of retail investors with slightly higher affordability may also opt for SIF. Unlike the mutual funds, which is a pure retail product, the SIF will not be as closely regulated as it is based more on the concept of “Caveat Emptor” or Let the Buyer Beware. Investing in SIFs, is less about the return potential and more about understanding the risks. Let us look at the risks of a long-short SIF. 

Since the first SIF launched in India will be a long-short SIF, let us look at the pros and cons. On paper it looks a great idea. Buy when you expect prices to go up and sell when you expect prices to go down. But, how do you do that in practical terms? Short selling is barred in India, unless it is for intraday purposes. The only way to short sell stocks is via the derivatives market, but it is limited to 216 stocks in India. Technically, one can borrow and sell, but stock lending and borrowing is far from attractive in India. So, it will have to be imperfect index shorts or correlation-based proxy shorts. As we have seen in the past, the short traps are quite common in India. 

Here are a few ground rules. If you are looking to plan for your retirement or daughter’s education, do it through well-regulated equity mutual funds, and avoid risky SIFs. The idea of SIF is for people who can afford to take a higher risk and even afford a bigger capital loss. Ideas like long-short and beta hedge look great on paper. However, actually implementing such an idea as a strategy in the Indian context is fraught with volatility and liquidity risks! SIFs strategies will be competing with the likes of Jane Street. One must indulge in it if they can afford to take that kind of risk and lose that kind of money. For core goals; SIFs are a strict “NO.”