SIFs bring institutional-grade investment strategies to retail investors in a regulated format: Mirae Asset's Gaurik Shah

India's newly introduced specialised investment funds (SIFs) could bridge the gap between retail and institutional investing by offering sophisticated investment strategies within a regulated mutual fund framework, according to Gaurik Shah, senior vice president – Equity Investments, Mirae Asset Mutual Fund.

In an interaction with Fortune India, Shah says the timing for the emergence of SIFs is driven by India's deep derivatives market, rising retail participation in futures and options (F&O), and the need for a transparent investment vehicle for advanced strategies.

SIFs address the gap between retail and institutional investing

According to Shah, India has one of the world's most active derivatives markets, particularly in single-stock derivatives, making it a unique market globally. Until now, sophisticated derivative-based strategies were largely confined to hedge funds, alternative investment funds (AIFs), and proprietary trading desks, limiting access for retail investors. Mutual funds, meanwhile, had little flexibility to offer such strategies.

"The post-COVID surge in retail participation in the F&O segment also exposed a gap, with many investors relying on unregulated advisors and social media influencers for guidance," Shah says. "SIFs address this by providing a transparent, regulated platform where investors can access sophisticated strategies managed by professional fund managers."

He describes SIFs as a mechanism that brings institutional-grade investment strategies into a mutual fund-like structure.

Who should invest—and who should avoid them

Shah believes SIFs are best suited for investors who understand portfolio construction and are willing to learn how different investment strategies generate returns.

He says these products can complement traditional portfolios by offering differentiated return streams and better risk-management tools. However, investors should not be attracted merely by the sophistication of a strategy.

"Understanding the source of returns and the associated risks is critical. If an investor does not understand how a strategy works, it is better to avoid investing until they do," he cautions.

Long-short strategies offer multiple sources of returns

Explaining how long-short investing differs from conventional equity mutual funds, Shah says traditional equity funds largely depend on rising markets to generate returns. In contrast, long-short strategies can derive returns from multiple sources, including stock selection, relative value opportunities, market trends, and risk management.

He also stresses that long-short investing is not a single strategy but a broad category encompassing market-neutral, directional, trend-following, and hedged approaches, each with distinct risk-return characteristics.

"The success of these strategies does not lie in their complexity but in maintaining a disciplined, systematic investment process backed by a clearly defined source of alpha," he said.

Derivatives are risk-management tools, not just speculative bets

Shah says one of the biggest misconceptions surrounding derivatives is that they are purely speculative instruments. "Institutional investors primarily use derivatives for managing risk," he said, comparing derivatives to a hammer. "In the wrong hands, it can cause damage, but in the hands of a skilled craftsman, it can create tremendous value."

He also challenges the common perception that hedging comes without a cost. "Hedging is similar to buying insurance. Investors pay a price for protection and may not immediately see its benefits. However, during periods of market volatility, that protection can become invaluable," he explains.

SIFs could challenge hybrid funds over time

Looking ahead, Shah expects SIFs to gradually compete with, and potentially take market share from, hybrid mutual funds due to the greater flexibility they offer.

As regulators and investors become increasingly comfortable with such products, he expects the market to witness more sophisticated offerings, including market-neutral funds, absolute return strategies, managed futures, and dedicated hedging solutions.

"India already has the necessary market depth. What is evolving now is the regulatory framework that can support a much wider range of sophisticated investment strategies. The overall direction is clearly positive," Shah adds.