Why do Specialised Investment Funds hold so much in money market instruments?

For three reasons: first, to earn active returns — TREPS, T-bills, and CDs yield 6–8% per year, and a 40% money market allocation contributes roughly 2.8–3.2% to total fund returns annually. Second, for liquidity — SIFs must be able to pay out redemptions quickly without selling equity at bad prices. Third, for deployment optionality — when quality equity opportunities are scarce, the money market earns carry while the manager waits.

Is the money market allocation in a SIF there to cover margin for the short positions?

Mostly no. The actual margin requirement for even a fund running 30% gross short in hedged positions is under 0.5% of NAV. Yet most SIFs hold 30–44% in money market instruments. The vast majority of those holdings are there to earn returns and provide liquidity, not to satisfy margin requirements.

What returns do TREPS and Treasury Bills earn in India?

As of mid-2026, TREPS (overnight interbank lending) earns approximately 6.0–6.8% per year. 91-day Treasury Bills yield 6.5–7.0%. Certificates of Deposit from banks yield 7.0–7.8%. Commercial paper from corporates yields 7.5–8.5%. These are real, risk-adjusted returns on the fixed income book, not nominal or marginal figures.

How should I think about the three return streams in a SIF portfolio?

Think of a SIF as three pots working simultaneously: Pot 1 is the equity alpha book, your best stock picks targeting equity-like returns. Pot 2 is the short alpha book — directional bets on stocks expected to fall, or hedges on existing longs. Pot 3 is the fixed income carry book — TREPS, T-bills, and CDs earning 6–8% per year. All three compound together. The money market pot is not a consolation prize; it is an active, deliberate return stream.

What is the actual cost of running a short book in a SIF?

The cost is not primarily the margin. For hedged shorts, margin is negligible — about 1.5% of notional. For naked shorts, margin runs 15–20% of notional, but that margin can be placed in yield-bearing instruments like T-bills so it still earns returns. The real costs are operational: monitoring positions, roll costs (futures expire monthly and must be renewed), and the risk of the directional trade going wrong.

The Cash in SIFs: Margin Security or Active Investment?

Part 5 of 6 in the Specialised Investment Funds series: Part 1 · Part 2 · Part 3 · Part 4 · Part 6

Look at any SIF portfolio and you will see it: a large chunk — anywhere from 20% to 45% — sitting in what looks like cash. TREPS. Treasury Bills. Certificates of Deposit. Money Market instruments.

The natural reaction is: "Why is so much of my investment just sitting in cash?"

The answer surprises most people. That "cash" is not idle, and it is not primarily there as margin security for the short positions. It is an active, deliberate part of the investment strategy, generating real returns while providing flexibility.

Let us work through exactly why, with numbers.

First, Let Us Understand Margin

When a SIF takes a short futures position, the exchange requires a security deposit. This is called the initial margin — the money the exchange holds as protection in case the trade moves against the fund.

The margin rate varies by instrument:

Index futures (Nifty, Bank Nifty): approximately 12% of notional value
Stock futures (outright/naked shorts): approximately 15–20% of notional value
Paired positions (long cash equity + short futures on same stock): approximately 1.5% of notional value, because the exchange recognises the hedge

This matters enormously. A hedged short requires almost no margin. A naked short requires significant margin.

The Numbers for Real Funds

Let us calculate the actual margin requirements for two of our funds and compare them to what they actually hold in money market instruments.

Arudha Hybrid Long-Short

Gross short: 31% of NAV.

All 33 short positions are paired with corresponding cash equity — these are hedged shorts. Margin rate for each: approximately 1.5% of notional.

Required margin: 31% × 1.5% = 0.47% of NAV

What the fund actually holds in money market instruments: 31%

So the fund holds 66 times more in money market than it needs for margin. The margin requirement is essentially negligible.

qSIF Hybrid Long-Short

Gross short: 24% of NAV.

Hedged shorts (paired): ~16.4% → margin required: 16.4% × 1.5% = 0.25%
Naked shorts: ~7.6% → margin required: 7.6% × 17% = ~1.3%
Total margin required: approximately 1.55% of NAV

What the fund actually holds in money market instruments: 44%

The fund holds 28 times more in money market than it needs for margin.

The Pattern

Across every SIF in our universe, the actual margin requirement, even when running significant short books — is a tiny fraction of what the fund holds in money market instruments. The largest possible margin requirement for any of our five funds is under 5% of NAV. The money market holdings range from 31% to 44%.

The conclusion is clear: the money market holdings are not there to cover margin.

So What Are They There For?

Three reasons, each important:

Reason 1: Earning Returns

This is the primary reason. Every rupee in money market instruments earns real, current-period returns:

Instrument	Typical Annual Yield
TREPS (overnight bank-to-bank lending)	6.0–6.8%
91-day Treasury Bills	6.5–7.0%
182-day Treasury Bills	6.6–7.1%
Certificates of Deposit (banks)	7.0–7.8%
Commercial Paper (corporates)	7.5–8.5%

A fund holding 40% in these instruments earns approximately 2.8–3.2% per year just from the fixed income book, without any equity positions. This is not a consolation prize. It is a deliberate, risk-adjusted return on that portion of capital.

The fund is simultaneously running:

An equity portfolio (targeting 12–18% returns on that portion)
A short book (targeting additional alpha from stock-picking)
A fixed income book (targeting 7–8% on that portion)

These three streams compound together. A 40% allocation to 7% instruments contributes approximately 2.8% to total fund returns per year before any equity or short performance.

Reason 2: Liquidity Management

Mutual funds, including SIFs — must be able to pay investors who want to redeem. Unlike a private equity fund or a hedge fund, a SIF cannot tell an investor "sorry, the money is locked up for three years."

Holding 30–40% in overnight TREPS means the fund can handle significant redemption requests immediately, without being forced to sell equity positions at unfavourable prices. This is operational necessity, not inefficiency.

Reason 3: Deployment Optionality

Markets do not always offer equally good opportunities. A fund manager who sees excellent stock-picking opportunities will deploy more into equity. When quality opportunities are scarce, she holds more in money market while the fixed income earns carry.

This is the "opportunity buffer": patient capital earning income while waiting for the right moment to deploy.

The Correct Mental Model

Think of a SIF portfolio in three distinct "pots":

Pot 1: Equity alpha (the long book) The fund's best stock picks. Targeting equity-like returns. Typically 30–70% of NAV.

Pot 2: Short alpha (the short book) Targeted directional bets on stocks expected to fall, or hedges on existing longs. Typically 8–31% gross short.

Pot 3: Fixed income carry (money market) TREPS, T-bills, CDs, earning 6–8% per year while providing liquidity and flexibility. Typically 20–44% of NAV.

A SIF investor is not getting a diluted equity experience. They are getting three return streams packaged together: equity alpha + short alpha + fixed income carry. The money market holdings are the third stream — working actively, not sleeping.

Comparing a SIF to a Regular Mutual Fund

A regular large-cap equity mutual fund holds 93–97% in equity and 3–7% in cash. Its return is almost entirely driven by stock selection and market direction.

A SIF like qSIF Hybrid holds 39% in equity, 44% in money market, and runs 24% gross short. Its returns come from stock selection (on the long side), stock selection (on the short side), and 6–8% per year on the fixed income book.

Neither is better in absolute terms. They are built for different objectives:

If you want maximum equity exposure and believe markets will rise strongly, the regular equity fund delivers more.
If you want smoother, less market-correlated returns that combine multiple sources of alpha, the SIF approach delivers something different.

The One Thing Margin Actually Costs

To be accurate: a small amount of the money market holdings does serve as margin collateral. The exchange accepts T-bills and high-quality bonds as margin, so the fund does not even need to hold cash — it can hold yield-bearing instruments as margin.

Even so, the true margin requirement for these funds is under 5% of NAV in most cases. That means at least 95% of the money market book is pure investment, not margin parking.

The real cost of running a short book is not the margin — it is the monitoring, the roll costs (futures contracts expire monthly and must be renewed), and the risk of the trade going wrong. But those are operational and strategy costs, not capital costs.

In the final article of this series, we will step back and ask the question that matters for every investor: given everything we have learned about the four building blocks, net and gross exposure, the hedged vs naked distinction, and fixed income carry — how should you actually evaluate a SIF?

Next: Part 6 — How to Evaluate a SIF: What the Numbers Actually Tell You →

Data: March 2026 AMFI portfolio disclosures. Full research methodology →

Investments in mutual funds are subject to market risks. Past performance is not an indicator of future returns. This analysis is for informational purposes only and does not constitute investment advice.