India’s investment landscape is evolving in a quiet but meaningful way. For years, investors have largely had to choose between two structures: mutual funds and portfolio management services (PMS). The distinction has been clear. Mutual funds offer regulatory comfort, standardisation, and ease of access. PMS, on the other hand, offers flexibility, sharper positioning, and the ability to run more differentiated strategies. So, a new structure was launched to fill this gap -- Specialised Investment Funds (SIFs).
SIFs retain the regulatory discipline and tax efficiency that investors associate with mutual funds. On the other hand, they introduce greater flexibility in how portfolios can be constructed and managed, something typically seen in PMS offerings. This includes the ability to use long-short strategies, adjust exposures dynamically, and move across segments without being tightly bound by category definitions.
Over the past five years, mid-caps have grown nearly 3.8 times, while small-caps have expanded as much as 6.5 times, significantly outpacing large-cap peers. These numbers reflect a broader structural trend -- as the economy expands, smaller and mid-sized companies tend to capture a disproportionate share of that growth.
Also, analyst coverage is less; roughly 10 analysts per stock in mid- and small-cap space compared to around 30 in large caps. This creates gaps in information and pricing, which in turn generate opportunities for active investors. Identifying them early is where much of the potential lies.
But the risks are just as evident. Mid- and small-cap stocks are more volatile, less liquid, and more sensitive to changes in sentiment. Historical patterns show that while the segment has outperformed in many years, it has also experienced sharper drawdowns during periods of stress.
Unlike traditional mutual funds, SIF can use derivatives i.e., take short positions, and adjust net exposure based on market conditions. These tools do not remove risk, but they provide a framework to manage it more actively.
For example, let's look at the example of a SIF like Altiva Equity Ex-Top 100 Long-Short Strategy. Designed within the SIF framework, the strategy invests exclusively in stocks ranked beyond the top 100 by market capitalisation. The strategy will follow a concentrated structure, i.e., 35 to 45 stocks. This level of concentration reflects genuine conviction rather than index-hugging caution.
Another layer to the approach lies in how businesses are selected. The framework focuses on four broad principles -- forensic checks on accounting quality and governance standards, investing at acceptable prices rather than chasing momentum, remaining agnostic to value or growth labels, and identifying scalable businesses with strong return on capital. In effect, the emphasis is not merely on finding fast-growing companies, but on identifying robust businesses where growth is supported by governance quality, balance-sheet discipline, and sustainable earnings power.
Also Read | ‘A portfolio is like an Indian thali’: Radhika Gupta explains why global diversification matters
At the same time, the strategy retains flexibility. A portion of the portfolio can be allocated to derivatives, cash, or even select large-cap stocks. This serves two purposes: managing risk and improving capital efficiency. The strategy is also benchmark-agnostic, allowing the portfolio to evolve as market conditions shift rather than remaining constrained by index composition.
Another important feature is its ability to move between mid- and small-cap stocks depending on where opportunities lie, recognising that leadership within the segment is constantly shifting.
The current market environment adds another dimension to this discussion. After a period of strong gains, mid- and small-cap stocks have seen a broad correction. Nearly 75 per cent of mid-cap stocks and about 82 per cent of small-cap stocks have fallen more than 20 per cent from their 52-week highs.
SMID valuations, where PE had reached nearly 40 times in September 2024, have since corrected to around 25-30 times. This level is now below the five-year average on both price-to-earnings and price-to-book measures. In effect, the market is pricing growth businesses closer to their historical averages. Such phases often create opportunities for strategies that rely on careful selection rather than broad exposure.
SIFs represent a more nuanced framework -- one that allows participation in growth while offering tools to manage volatility. In a segment where both upside and downside are amplified, the structure of investing is becoming as important as the opportunity itself.
Disclaimer: Radhika Gupta is the MD & CEO at Edelweiss Asset Management Limited (EAML) and the views expressed above are her own.
Disclaimer - Investments in Specialised Investment Fund involve relatively higher risk, including potential loss of capital, liquidity risk and market volatility. Please read all investment strategy-related documents carefully before making the investment decision.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and twitter handle
