Big change for mutual fund investors as SEBI overhauls fund categories

India’s mutual fund industry is headed for a major reshuffle after the Securities and Exchange Board of India rolled out a fresh set of rules that redraw how schemes are classified and run, a move aimed at pruning product clutter and making risks easier for investors to understand.

Categories redrawn to cut overlap

At the core of the new framework is a tighter and cleaner split between equity, debt and hybrid funds. SEBI has reworked category definitions to ensure that schemes with similar labels actually follow similar strategies. Equity funds will now operate under clearer rules for large-cap, mid-cap and small-cap segments. Multi-cap funds, which earlier had greater flexibility, will be required to keep at least 75 per cent of their assets in equities, up from the earlier 65 per cent, bringing them closer to their stated mandate.

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While, debt funds are going to be categorised majorly on the basis of duration and maturity, a change that is likely to help investors better assess interest-rate risk. Hybrid funds will also see tighter regulations, with fixed equity-debt allocation bands to mainly prevent sharp and frequent changes in the portfolio mix.

Solution-oriented schemes to be wound down

In a significant clean-up move, SEBI has done away with the solution-oriented fund category. These schemes will stop taking fresh subscriptions with immediate effect. Existing schemes will eventually be merged with comparable offerings in other categories, reducing the number of overlapping products in the market.

Life cycle funds make a formal entry

The new rules also open the door for life cycle, or target-date, funds. These schemes will automatically rebalance portfolios over time—starting with a higher equity allocation and gradually shifting towards debt as the target maturity approaches. Fund houses will be allowed to launch life cycle funds with tenures ranging from 5 to 30 years, with an exit load capped at 3 per cent. Scheme names will require to mention the maturity year, providing clarity to investors.

Fund of funds face tighter scrutiny

SEBI has tightened norms for fund of funds (FoFs), which invest in other mutual fund schemes. Under the revised framework, FoFs will be required to deploy at least 95 per cent of their assets in underlying funds. Separate categories will be created for equity, debt and hybrid FoFs. Commodity FoFs will be restricted to gold and silver exposure, while overseas FoFs will follow a separate rulebook, including permission for country- and region-focused strategies.

For FoFs investing in both domestic and overseas funds, a minimum allocation of 35 per cent each will be mandatory. SEBI has also put limit on the number of FoFs that an asset management company is allowed to offer, with excess schemes required to be merged.

SEBI pushes for investor transparency

Apart from the structural changes, SEBI has also taken cognisance on transparency. Fund houses will now be required to show portfolio overlap on a monthly basis, providing investors clearer visibility into duplication across schemes. Scheme names are suppose to strictly showcase their category and investment mandate. Passive products such as index funds and ETFs will also be facing tighter norms and regulations, with at least 95 per cent of assets required to be invested in index constituents.

Transition window to align with the new framework

SEBI has allowed the asset management companies a defined transition window to come in line with the existing schemes and with the new framework.