SEBI Proposes Overhaul of Mutual Fund Categorization; Seeks Public Comments by August 8
By Shishta Dutta | Published at: Jul 18, 2025 08:04 PM IST
Mumbai, July 18, 2025 – The Securities and Exchange Board of India (SEBI) has released a Draft Circular on Categorization and Rationalization of Mutual Fund Schemes for public consultation, aiming to enhance transparency, investor understanding, and ensure distinct portfolio structures across the ₹55-lakh crore mutual fund industry.
The draft puts forward a complete revision of the current framework outlined in the 2017 and 2020 circulars. The goal is to encourage innovation in product offerings while ensuring the schemes don’t end up overlapping with each other.
Key Highlights of the Draft
Revised Classification Framework
Under the revised Clause 2.6 of Chapter 2 in the SEBI Master Circular for Mutual Funds (dated June 27, 2024), mutual fund schemes will now be grouped into:
| Scheme Group | Description |
|---|---|
| Equity Schemes | Invest predominantly in equity and related instruments |
| Debt Schemes | Invest predominantly in debt and related instruments |
| Hybrid Schemes | Invest across equity, debt, REITs, InvITs, and even gold/silver instruments |
| Solution-Oriented Schemes | Cater to specific life goals like retirement and children’s education |
| Other Schemes | Includes index funds, ETFs, Fund of Funds, and life cycle FoFs |
Each group includes multiple subcategories with standardized naming conventions and minimum investment thresholds to ensure schemes remain “true-to-label”.
Portfolio Overlap Restrictions Introduced
SEBI has observed significant overlap among existing mutual fund schemes. To curb redundancy and protect investor interest, the draft introduces overlap thresholds:
- Value vs. Contra Funds: Maximum 50% portfolio overlap permitted; to be monitored at NFO and semi-annually. Failure to comply may trigger investor exit without exit load.
- Sectoral/Thematic Equity Schemes: Maximum 50% overlap allowed with other schemes in this segment (excluding large cap funds).
- Sectoral Debt Funds: Capped at 60% overlap with other debt category schemes; subject to availability of sufficient investment-grade papers.
Additional Scheme Provision
To prevent overcrowding in scheme categories, new schemes can be launched only if:
- The existing scheme is over 5 years old
- AUM exceeds ₹50,000 crore
- Subscription to the old scheme halts post-launch of the new one
Each new scheme must use similar nomenclature (e.g., Large Cap Scheme – Series II) and adhere to identical investment mandates.
Public Feedback Sought on 20 Proposals
Among the proposals open for comments are:
| Proposal No. | Key Proposal |
|---|---|
| 1 | Allow residual equity scheme allocation in debt, REITs, InvITs, gold/silver |
| 2 | Permit both Value and Contra Funds with ≤50% overlap |
| 5 | Rename “Duration” in debt schemes to “Term” for clarity |
| 9 | Add duration ranges in scheme names, e.g., Medium Term Fund (3–4 years) |
| 15-17 | Introduce Life Cycle Funds for specific goals with target dates and varied lock-in periods |
Comment Submission Details
- Deadline: August 8, 2025
- Submission Link: SEBI Public Comment Form
- Contact (for technical queries):
- Anupma Chadha (GM): anupmac@sebi.gov.in
- Jubin Mehta (DGM): jubinm@sebi.gov.in
- Ashish Saini (AM): ashishsaini@sebi.gov.in
Regulatory Timeline
- Effective Date: Upon issuance of the final circular
- Compliance Period for Existing Schemes: 6 months for alignment from the date of the circular
REF: https://www.sebi.gov.in/reports-and-statistics/reports/jul-2025/consultation-paper-on-categorization-and-rationalization-of-mutual-fund-schemes_95419.html
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