Heat on hedge funds from new sub-₹10 lakh product

A new investment product designed to hook India's wealthier retail investors may eat hedge funds' lunch given their tax edge and target audience, industry executives said.

- Srushti Vaidya

Specialized investment funds (SIFs) are a bridge between retail-focused mutual funds and portfolio management services (PMS) targeting the rich. While entry to alternative investment funds (AIFs) starts at ₹1 crore and they are taxed at the highest marginal rate, one can sign up for an SIF with ₹10 lakh, and enjoy the same tax treatment as mutual funds.

Industry experts said that long-short funds, which bet on both rising and falling markets—are expected to take a bigger hit.

"A long-short fund in an SIF will be tax-efficient compared to a long-short fund in an AIF," said Rahul Charkha, partner at Economic Laws Practice.

Income earned by Cat-3 AIFs, which work as trusts, are taxed at the AIF level at the maximum marginal rate, Charkha added. Thus, in the case of long-short funds, gains would be taxed as business income at the AIF level at the top rate of 39%, he added.