Ex-Top 100 Long-Short: A Practical Case For SIF Equity Strategies

To address the long-standing structural gap between traditional mutual funds and Portfolio Management Services, Securities and Exchange Board of India (SEBI) has introduced Specialised Investment Funds (SIFs) under the mutual fund regulations. SIFs are positioned as an intermediate investment vehicle. They retain the governance, transparency, and disclosure standards of mutual funds while allowing greater portfolio flexibility in strategy design, asset allocation, and risk management.

Within the SIF framework, seven structures are permitted: three equity, two hybrid, and two debt strategies. Among the equity options, the Ex-Top 100 Long-Short category stands out. This SIF aims to invest at least 65% in companies outside the top 100 by market capitalisation, i.e., primarily mid- and small-cap stocks, and to combine long positions with selective short exposure through derivatives.

The case for focusing on Ex-Top 100 stocks is rooted in market structure. Over time, the share of market capitalisation held by mid- and small-cap companies has increased, while large-cap dominance has marginally declined. These small- and mid-cap stocks (SMID stocks) often outperform sharply during economic upcycles as earnings growth accelerates and liquidity improves. However, the same segment tends to give back a significant part of that outperformance during downcycles due to higher volatility, lower liquidity, and sharper valuation corrections.

Investor behaviour amplifies this pattern. Periods of strong performance attract inflows driven by greed, while market corrections trigger fear-based exits. These emotional responses often result in poor timing decisions and sub-optimal realised returns. For investors seeking exposure to SMIDs but wary of volatility, a long-short strategy offers a more balanced approach.

An Ex-Top 100 Long-Short SIF seeks to address these challenges in three ways. First, it aims to generate returns in both rising and falling markets by taking long positions in fundamentally attractive mid- and small-cap stocks, while shorting those that appear overvalued or structurally weak. Second, the use of multiple strategies: stock selection, valuation arbitrage, and tactical hedging, helps diversify sources of return rather than relying on a single market direction. Third, controlled short exposure can dampen portfolio volatility, improving risk-adjusted outcomes over a full market cycle.

From a market development perspective, this strategy will also contribute to depth and liquidity. Data from the derivatives market shows that Ex-Top 100 stocks already account for a meaningful share of open interest in both futures and options. Expanding institutional participation through regulated long-short funds can further improve price discovery and reduce extreme mispricing in the broader market.

From an investor standpoint, the appeal is straightforward. The strategy focuses exclusively on companies outside the top 100, offering access to a wider opportunity set. It follows a clear philosophy of seeking risk-adjusted returns rather than headline performance. Taxation is aligned with equity mutual funds, with long-term capital gains applicable after a 12-month holding period. Importantly, the structure remains open-ended, providing liquidity and regulatory comfort.

In summary, the Ex-Top 100 Long-Short strategy under the SIF framework represents a thoughtful evolution in India’s investment landscape. It recognises the growth potential of mid- and small-cap stocks, acknowledges the behavioural and volatility risks inherent in the segment, and offers a disciplined, transparent way to participate without taking unhedged directional bets. For investors looking beyond traditional long-only equity exposure, this is a category worth serious consideration.

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