Capital market regulator Sebi has issued a draft circular on July 18, proposing a significant overhaul of mutual fund scheme categorisation and rationalisation norms in an effort to enhance investor clarity, curb portfolio overlaps, and enabling product innovation.
This includes allowing mutual funds to launch a second scheme of the same category. The proposal suggests that an AMC may launch an additional scheme within an existing mutual fund category if the original scheme is over five years old and has an AUM exceeding Rs 50,000 crore. "The new scheme must have similar investment objectives, strategy, and asset allocation, with a separate Scheme Information Document. Once launched, the original scheme must stop accepting subscriptions. The additional scheme must follow the same disclosure norms and maintain the same TER as the original," the draft circular notes. A separate fund manager may be appointed, and similar naming must be used to avoid confusion.
The proposed changes to the October 6, 2017 circular on MF scheme categorisation comes amid a sharp expansion in mutual fund assets and investor base over recent years.
The draft has been released for public consultation, with comments invited until August 8, 2025 via Sebi’s web portal.
On July 17, Moneycontrol had exclusively reported that the regulator was soon slated to release a draft circular on simplification of classification of mutual fund schemes.
In the circular, Sebi noted that the mutual fund industry has grown significantly, both in terms of assets under management (AUM) and investor participation.
"In view of these developments and based on representations received from the industry and AMFI, a need was felt to review the categorization circular (dated October 6, 2017) to allow flexibility for product innovation while maintaining investor protection and scheme clarity," the regulator added.
As per regulation, for easy identification by investors and to bring uniformity in names of schemes in a particular category, the scheme name shall be the same as the scheme category, the circular noted, in an effort to ensure the schemes remain ‘true-to-label’.
As a part of compliance checks on categorization, the regulator said it had also observed that in some cases that there was a significant overlap in portfolios, therefore, it was felt necessary to introduce clear limits to avoid schemes with similar portfolios.
The circular includes 20 proposals across five main categories - Equity, Debt, Hybrid, Solution-oriented schemes and Other Schemes.
What are the other proposals?
One of the key proposals is to allow mutual funds to use residual assets (the portion of a scheme’s portfolio not invested in its primary asset class) permitting them to invest this portion in debt, money market instruments, gold, silver, REITs, and InvITs, within regulatory limits. This is for both equity and debt funds.
SEBI has also proposed tighter limits on portfolio overlap to preserve scheme differentiation. It suggests allowing both Value and Contra funds within the same fund house, provided the overlap in holdings doesn’t exceed 50%. For sectoral and thematic equity schemes (excluding large caps), the circular has asked for feedback on whether the 50% overlap is sufficient to avoid scheme differentials. Portfolio overlap would be monitored at the time of new fund offers (NFOs) and on a semi-annual basis.
SEBI proposes to standardise scheme names and make them more descriptive. It has proposed changing the term “Duration” in debt fund names to “Term” and renaming “Low Duration Funds” as “Ultra Short to Short Term Funds.” Additionally, scheme names may soon include their investment tenure — for instance, “Medium Term Fund (3–4 years).” The term “Fund” may also be replaced with “Scheme” across all categories to align with regulatory terminology.
It has also proposed allowing mutual funds to launch sectoral debt funds to ensure that allowed to launch sectoral debt fund subject to ensuring that no more than 60% of the portfolio in a sectoral debt scheme overlaps with any other sectoral debt scheme/debt category scheme, while also ensuring sufficient availability of investment-grade paper in the chosen sectors, and exempting such schemes from the sectoral exposure limits.
In hybrid and arbitrage strategies, the paper suggests that Arbitrage Funds may be allowed to take exposure to debt instrument restricted to short-term government securities and repos backed by such securities. Equity Savings Schemes may also be required to maintain a net equity and arbitrage exposure of 15%–40%, with defined minimum allocations to equity and debt.
Finally, fund houses may be allowed to launch a second scheme in an existing category, but only if the original scheme is over five years old, has assets exceeding Rs 50,000 crore, and stops taking new investments after the new launch amongst others.
The draft circular also highlights that to address the risk of proliferation in index/ETF category, a separate framework will also be introduced.
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