SIFs should be satellite holdings, not the core of portfolios: Morningstar CEO Kunal Kapoor

Specialised investment funds (SIFs) should usually be treated as small satellite holdings rather than the core of an investor’s portfolio, Morningstar CEO Kunal Kapoor said, cautioning that the flexibility offered by long-short strategies, derivatives and active asset allocation also brings greater complexity, costs and a wider range of outcomes.

With most SIFs only months old, early performance data offers limited insight into their long-term potential, Kapoor said. While the new category could expand India’s managed-investment market and intensify competition, investors should prioritise simplicity, diversification and cost discipline.

Edited excerpts from a chat:

India’s mutual fund industry has seen sustained SIP participation despite market volatility. Is this growth becoming structurally driven, or is it still heavily dependent on market performance and investor sentiment?

SIPs have been a very positive force for investors in India, helping take the element of market timing out of investing and encouraging a more disciplined, long-term approach. Over the last decade, SIPs have grown significantly in both assets and popularity, and that is encouraging because it helps investors build the habit of consistently putting money away and creating a portfolio over time. We are also seeing broader participation and investors staying invested for longer, both of which are positive developments. I believe SIPs can continue to have a lasting impact on investor behaviour and remain an important source of growth for the market.

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Equity mutual fund inflows remain strong, but investors are increasingly choosing midcap, smallcap, thematic and passive products. Is product selection becoming more performance chasing?

Some of it is performance chasing, and some of it reflects a genuinely broader and better market. The important thing is to separate the two.

When I was growing up in India, putting money into a smaller company often meant you had little idea what the promoter was going to do with it. That is not the market investors face today. Governance, disclosure and liquidity across the broader market have improved considerably, and many good, domestically focused businesses sit in that part of the market. Owning some of them can make sense.

But when flows follow whatever did best over the past year or two and concentrate in the most volatile categories, recent returns are doing too much of the talking. For most investors, the core should be broad and diversified, with mid-cap, small-cap or thematic exposure built around it—not the other way round.

How do you see the evolution of Specialised Investment Funds (SIFs)? Will they genuinely fill the gap between mutual funds and PMS, or could they create another layer of product complexity for investors?

SIFs address a real gap between mutual funds and PMS or AIF products. The framework offers more flexibility while retaining disclosure and oversight that investors recognise.

But I would temper the excitement. Long-short strategies, derivatives and active asset allocation are more complex. Complexity usually brings higher costs and a wider range of outcomes. Most SIFs are only months old, so early return numbers tell us very little.

With a ₹10 lakh minimum investment, SIFs also address a relatively small segment. Some assets may come from PMSs, AIFs and mutual funds, but I would expect SIFs to expand the managed-investment market more than disrupt it. The more important effect may be greater competition, which can improve transparency, put pressure on costs and ultimately benefit investors.

Whether SIFs fill the gap or simply add another layer of complexity will depend on investor understanding and cost discipline. For most investors, simplicity is still the winning game. If a SIF has a role, it should usually be a small satellite holding—not the core of the portfolio.

India has a much larger active-fund ecosystem than mature markets such as the US, where passive investing has gained substantial ground. Is India likely to follow the same trajectory?

I do not think the most useful debate is active versus passive. It is value for money. A high-cost active fund has a very hard time justifying its existence. A low-cost active fund with a strong team and a patient, repeatable process can earn a place—I own some myself. But the bar is high, and it keeps getting higher.

In large caps, where coverage is deep and prices are generally efficient, it has become very difficult for active managers to beat the index consistently after fees. That is where I would lean on low-cost index exposure for the core. In mid- and small-cap markets, thinner coverage and less evenly distributed information may create more room for skill, although not every year and certainly not for every fund. Fixed income is another area where good active managers can add value through credit selection, duration and liquidity management.

My rule of thumb is straightforward: passive is a sensible default in the most efficient parts of the market. Before paying for active management elsewhere, look hard at the people, the process and the cost.

India now has more than 50 AMCs and then SIFs are also getting a lot of love from investors. But at the same time, it is also creating a problem of plenty for investors who want to keep things simple. Would you agree to that?

Investors have more choices than ever. That is a good problem to have: greater transparency, lower costs and more competition have made investing far better than it was a generation ago.

But more choice does not automatically produce better outcomes. Most investors can meet their goals with a simple portfolio built around a diversified core. You do not need a fund from every AMC or a piece of every new product launch.

The real risk is hidden concentration. When manufacturing, defence, infrastructure, financials or consumption becomes the story of the moment, investors can end up owning the same stocks through several funds and mistake that for diversification. We have seen a similar pattern globally with AI-related stocks.

What matters is looking through the labels and understanding what you actually own. Check fund overlap, sector exposure and style exposure—that is exactly why we built tools such as the Morningstar Style Box. If three funds hold the same top stocks, you may effectively own one portfolio while paying three sets of fees. Start with a broad, diversified core and be deliberate about anything you add around it.

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