India’s capital markets are often celebrated as one of the greatest success stories of financial inclusion. Over the last decade, millions of first-time investors have entered equity markets through digital brokerages, mobile trading platforms, and low-cost investment products. However, beneath this narrative of democratization lies a more troubling reality particularly in the f&o market.

According to a recent study conducted by the Securities and Exchange Board of India (SEBI), nearly 93% of individual retail traders in the equity Futures and Options (F&O) segment incurred losses between FY22 and FY24. During this three-year period, cumulative losses exceeded ₹1.8 lakh crore. In FY24 alone, around 73 lakh individual traders participated in equity derivatives trading, of which 91.1% ended the year with net losses.

These numbers reveal a fundamental contradiction. While access to sophisticated financial instruments has expanded dramatically, successful participation has not. India has emerged as one of the world’s largest derivatives markets by trading volume, yet for most retail participants, derivative trading has become a mechanism for wealth destruction rather than wealth creation.

The issue is not the derivative instruments themselves. Futures and options were originally designed as risk-management tools that allow market participants to hedge exposures, transfer risk, discover prices, and improve capital efficiency. The problem arises when these instruments are used without the institutional frameworks necessary to manage their complexity.

Most retail traders operate without quantitative models, portfolio-level risk controls, disciplined position sizing, or hedging mechanisms. In contrast, institutional participants rely on sophisticated analytics, algorithmic execution systems, and structured risk management processes. The result is a structural imbalance where retail investors often compete in a market designed for professional participants.

Recognizing this challenge, SEBI introduced the Specialised Investment Fund (SIF) framework, effective from April 1, 2025. While the framework has attracted attention as a new investment product category, its significance extends far beyond product innovation. It represents an attempt to address a long-standing structural gap in India’s investment ecosystem.

The Missing Middle in Indian Asset Management

Historically, Indian investors faced a polarized investment landscape.

At one end were traditional mutual funds, which offered accessibility, diversification, and regulatory protection. However, these funds were largely restricted to long-only investment strategies and had limited flexibility in deploying derivatives for return generation.

At the other end were Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), which provided access to sophisticated strategies such as long-short investing, arbitrage, market-neutral portfolios, and tactical asset allocation. Yet these vehicles remained inaccessible to most investors due to minimum investment requirements of ₹50 lakh and ₹1 crore respectively.

This created what may be described as a “missing middle” in India’s investment ecosystem. Investors seeking more sophisticated strategies than traditional mutual funds but lacking the capital required for PMS and AIFs had few viable alternatives.

The SIF framework seeks to bridge this gap by introducing a minimum investment threshold of ₹10 lakh, while allowing accredited investors to participate with investments as low as ₹1 lakh. More importantly, it enables professionally managed access to advanced investment strategies that were previously reserved for institutional and high-net-worth investors.

To ensure institutional standards, SEBI has imposed stringent eligibility criteria. Only established Asset Management Companies (AMCs) with substantial experience and scale can launch SIFs. Eligible AMCs must possess a minimum three-year track record and average assets under management exceeding ₹10,000 crore. Alternatively, firms must appoint experienced investment professionals with a proven history of managing large portfolios.

This balance between accessibility and professional oversight is perhaps the most distinctive feature of the framework.

Reimagining the Role of Derivatives

The most transformative aspect of SIFs lies in how they redefine the role of derivatives within regulated investment products.

Traditional mutual funds primarily use derivatives for defensive purposes such as hedging market risk. Under the SIF framework, derivatives can also be deployed as active return-generating instruments.

This distinction is significant because it enables investment managers to pursue returns that are not entirely dependent on rising markets.

For instance, SIFs are permitted to establish unhedged short positions through exchange-traded derivatives, allowing fund managers to express negative views on specific companies or sectors. To prevent excessive risk-taking, SEBI has capped unhedged short exposure at 25% of a fund’s net assets.

The framework also permits gross portfolio exposures of up to 200% of net assets in certain categories, providing greater flexibility than traditional mutual funds. Furthermore, SIFs can maintain more concentrated portfolios, enabling managers to allocate capital more aggressively toward high-conviction opportunities.

Such provisions bring India closer to global asset management practices where long-short funds, alternative mutual funds, and liquid alternatives have become important components of investor portfolios.

From Directional Bets to Risk-Adjusted Strategies

One of the most important implications of SIFs is the shift from directional investing toward strategy-based investing.

In conventional equity investing, portfolio performance is largely dependent on the broader market trend. If markets decline sharply, even high-quality portfolios may struggle to generate positive returns.

SIFs introduce the possibility of generating returns through relative value strategies, arbitrage opportunities, volatility trading, and tactical asset allocation.

Cash-futures arbitrage, for example, involves simultaneously purchasing a stock in the cash market while selling its futures contract at a premium. This strategy seeks to capture pricing inefficiencies while minimizing directional market risk. Industry estimates suggest that such strategies have historically generated annualized returns broadly ranging between 6% and 8%, depending on market conditions and interest rate environments.

Similarly, options-based strategies such as straddles and strangles allow fund managers to potentially benefit from market volatility itself rather than predicting whether markets will rise or fall. These approaches are particularly useful during earnings seasons, major policy announcements, and periods of heightened economic uncertainty.

Such strategies have long been available to institutional investors. SIFs represent an attempt to make them accessible to a broader segment of the investing population through professionally managed vehicles.

Balancing Innovation with Investor Protection

Greater flexibility inevitably introduces greater risk.

SEBI’s challenge was therefore to encourage innovation without compromising investor protection. The SIF framework incorporates several safeguards designed to achieve this balance.

Funds are required to disclose a monthly Risk-Band ranging from Level 1 to Level 5, providing investors with a transparent assessment of portfolio risk. In addition, distributors selling SIF products must obtain the NISM Series-XIII Common Derivatives Certification, ensuring a minimum level of derivative-market expertise among intermediaries.

These measures recognize an important reality: sophisticated products require sophisticated understanding. Investor protection cannot rely solely on regulation; it must also be supported by transparency and financial literacy.

The Broader Economic Significance

The importance of SIFs extends beyond individual investors.

From a market structure perspective, professionally managed derivative strategies may contribute to more efficient price discovery, deeper market liquidity, and reduced speculative participation by uninformed traders. By channeling capital through institutional frameworks rather than direct retail speculation, the market may become more resilient and less prone to irrational trading behavior.

There is also a strategic implication for India’s asset management industry.

Globally, alternative investment strategies have grown significantly over the past two decades. In the United States and Europe, liquid alternative funds and long-short strategies have become mainstream components of portfolio construction. India’s asset management industry has historically lagged in this segment due to regulatory restrictions and accessibility barriers.

The introduction of SIFs could accelerate the development of a domestic alternatives ecosystem, enabling Indian investors to access a wider range of risk-return profiles without requiring ultra-high-net-worth status.

Conclusion

The statistics emerging from India’s derivatives market are difficult to ignore. When 93% of retail traders lose money and cumulative losses exceed ₹1.8 lakh crore within three years, the issue is no longer individual decision-making; it becomes a question of market structure.