End of 'look-alike' NFO era? MF industry weighs in on SEBI’s fund regulation shake-up

The sweeping overhaul of the mutual fund categorisation framework superseded its 2017 categorisation circular.

• SEBI limits mutual fund portfolio overlaps to 50%
• Lifecycle funds to replace retirement and children's schemes
• New debt fund category for intermediate short-term investors introduced

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The Securities and Exchange Board of India (SEBI) in its surprise February 26 circular has tightened scheme categorisation norms, capped portfolio overlaps, introduced Life Cycle Funds, and discontinued solution-oriented schemes such as retirement and children’s funds. The sweeping overhaul of the mutual fund categorisation framework supersedes its 2017 categorisation circular.

The move aims to reduce duplication, enforce mandate discipline, and make fund labels clearer. While most industry players see it as a long-overdue clean-up, some raised concerns of transition risks and adding to investor confusion.

Push to reduce duplication

A key focus is sharper category definitions and limits on portfolio overlap.

Value and Contra funds run by the same AMC can now have a maximum 50% overlap. Sectoral and thematic funds are also capped at 50% overlap with other sectoral themes (excluding large-cap funds). SEBI has allowed a three-year glide path: 35% reduction in excess overlap in year one, another 35% in year two, and full compliance by year three.

Aditya Agarwal, Co-founder of Wealthy.in, said the intent is to bring discipline and clarity by ensuring schemes stick to their mandates. “Reducing overlap and sharpening definitions makes the landscape more transparent and easier to navigate for investors and distributors. Over time, this should strengthen trust,” he said.

Similarly, Shweta Rajani, Head – Mutual Funds at Anand Rathi Wealth, called it a positive step, noting that the phased timeline gives AMCs time to recalibrate. If meaningful differentiation isn’t achieved, schemes may have to merge. Investors, she added, will be able to track how portfolios evolve during the transition. Smaller thematic funds that fail to stand out could eventually be consolidated, she explained.

Fewer lookalike NFOs?

The norms may also slow new fund launches. Rajani said many recent NFOs were floated not to offer new strategies but to gather fresh assets once older schemes grew large.

“Every new scheme now has to be meaningfully different. That’s very positive and brings clearer differentiation,” she said.

Industry observers expect the rules to curb “me-too” funds and the surge in thematic launches, forcing AMCs to better justify new offerings.

In February 2025, former SEBI Chair Madhabi Puri Buch said the regulator had issued a consultation paper to examine the rise in thematic funds rather than simply cap their numbers. “We do not want to take a surface-level approach… We understood the NFO-related problem and took corrective action,” she said, adding that SEBI remains open to addressing root causes.

Lifecycle funds replace solution-oriented schemes

The most surprising change is the replacement of retirement and children’s funds with lifecycle funds.

Instead of goal-labelled schemes, lifecycle funds will be structured around time horizons—such as five, ten, or fifteen years with asset allocation automatically shifting from equity to lower-risk assets as maturity approaches.

Radhika Gupta, MD & CEO of Edelweiss Asset Management, called it a major step for goal-based investing. She said lifecycle funds align asset allocation to time horizons, gradually reducing risk as goals near, “simple in concept, powerful in outcome.”

Agarwal added that the move aligns India more closely with global best practices in time-based asset allocation.

However, some industry voices were critical. One executive, speaking anonymously, said retirement and children’s funds had potential and were not given enough time to mature and were not promoted well by the industry. They added that sudden changes also add to confusion for investors.

Bridging the debt duration gap

SEBI has also introduced a new debt fund category between ultra-short and short duration funds, targeting investors with intermediate short-term horizons. Rajani said this fills a gap for those parking money for eight or nine months, offering clearer choices aligned to time and liquidity needs.

Welcome move, but watch execution

While the direction has been widely welcomed, investors in retirement and children’s funds should monitor merger details closely. Many such schemes carry five-year exit loads, and unless mergers are treated as fundamental attribute changes, a load-free exit window may not be available.

Rajani advised investors to review the scheme they are moved into and ensure it matches their financial timelines.

Ultimately, experts say that the impact will depend on fineprint. Several fund houses said it is too early to comment in detail, with more clarity expected in the coming days.