SEBI’s latest consultation paper introduces sweeping changes across equity, debt, hybrid, and solution-oriented mutual fund schemes aimed at rationalising offerings and enhancing transparency.
In a significant move set to reshape the mutual fund landscape, the Securities and Exchange Board of India (SEBI) has proposed a comprehensive review of scheme categorisation and portfolio rationalisation for mutual funds.
The proposed changes aim to:
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Eliminate portfolio overlaps between similar schemes,
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Introduce clearer nomenclature,
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Enable innovative fund structures, and
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Ensure investors receive products aligned with their financial goals and risk profiles.
SEBI has opened the consultation for public feedback until August 8, 2025.
Key Proposals at a Glance
Equity Funds: Reducing Overlap, Increasing Differentiation
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Value and Contra Funds can coexist only if portfolio overlap is ≤ 50%.
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Overlap monitoring will occur:
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At the time of New Fund Offer (NFO), and
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On a semi-annual basis using month-end portfolios.
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Portfolio breach?
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AMC must rebalance in 30 business days, with a one-time extension of 30 days.
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If overlap persists, exit option without load must be provided to investors.
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Sectoral & Thematic Funds:
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No more than 50% overlap with other equity schemes (excluding large-cap).
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Compliance required within one year for existing schemes.
Residual Allocation Flexibility:
Equity schemes can invest in:
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Debt and money market instruments
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Gold & silver (as per SEBI rules)
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REITs & InvITs
Subject to prescribed asset-class limits.
Debt Funds: Better Names, Better Understanding
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‘Duration’ to be replaced with ‘Term’ in fund names for clarity.
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Low Duration Fund → Ultra Short to Short Term Fund
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Scheme names to specify the duration explicitly, e.g.:
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Overnight Fund (1 Day)
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Medium Term Fund (3–4 Years)
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Sectoral Debt Funds:
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Allowed if overlap ≤ 60% with other debt schemes.
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Adequate supply of investment-grade papers required.
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Exempted from sectoral exposure limits under Clause 12.9.1.
Residual Allocation:
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Can include REITs & InvITs, except in:
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Overnight, Liquid, Ultra-Short, Low Duration, and Money Market Funds
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Hybrid Funds: Refined Structure and Exposure Limits
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Arbitrage Funds can invest only in:
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Government securities (maturity < 1 year)
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Repos backed by government securities
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Equity Savings Schemes must maintain:
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15% to 40% in net equity and arbitrage exposure
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Residual investments in REITs & InvITs allowed for hybrid schemes
(except Dynamic Asset Allocation & Arbitrage Funds)
Solution-Oriented Funds: Goal-Based Investing Gets a Boost
SEBI plans to allow:
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Life Cycle Fund of Funds (FoFs) for specific goals:
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Housing, marriage, children’s education, etc.
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Lock-in periods: 3 / 5 / 10 years with clear rationale
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Target-date FoFs investing in a pre-defined structure
FoFs can invest in:
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Most hybrid schemes (excluding Aggressive Hybrid, Dynamic Asset Allocation, Multi-Asset Allocation)
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Most debt schemes, except All Seasons Bond Fund
Launching Additional Schemes: Stricter Criteria
Asset Management Companies (AMCs) may launch additional schemes in existing categories if:
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Existing scheme is 5+ years old
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Has an AUM > ₹50,000 crore
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Similar investment objective, strategy & asset allocation
Conditions include:
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New scheme must have a separate Scheme Information Document (SID)
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Same naming convention (e.g., Large Cap Fund – Series I & II)
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AMC may assign a separate fund manager
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New scheme must match TER (Total Expense Ratio) of the existing one on the date of NFO
If the existing scheme sees a significant AUM decline, AMC may:
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Merge it with the new scheme
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Ensure no more than two schemes exist in a category at any time
What This Means for Investors
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Clarity in scheme differentiation
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Better portfolio diversification
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Less duplication across fund houses
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More innovative, goal-oriented investment options
These changes are expected to streamline the mutual fund universe and empower investors to make better-informed decisions.
Source: The Economic Times