SEBI’s twin fund plan stirs debate: Will it clarify or confuse retail investors?

SEBI’s twin fund plan stirs debate: Will it clarify or confuse retail investors?

The Securities and Exchange Board of India’s proposal to allow mutual fund houses to launch a second scheme within the same category has drawn a mixed response from advisors and distributors, who flagged concerns over investor clarity and the potential impact on SIP continuity.

The draft circular, released on July 18, allows Asset Management Companies (AMCs) to launch a second scheme in any category — such as large-cap or mid-cap—provided the first fund is at least five years old and has over Rs 50,000 crore in AUM. Public comments are open until August 8.

While the proposal caps total expense ratios (TERs) at the scheme level—seen as investor-friendly—advisors say it risks reversing SEBI’s 2017 reform to rationalise fund categories.

“Having multiple schemes in the same category is a step back from the categorisation and rationalisation efforts. The industry has worked hard to align with that structure over the last 7–8 years,” said Amol Joshi of PlanRupee Investment Services.

Sachin Jain of Scripbox echoed that sentiment, saying fund design and disclosures must prioritize transparency. “Two large-cap funds from the same AMC with overlapping portfolios won’t help investors. It creates performance divergence without clear differentiation.”

Distributors also flagged complications for investors using aggregator platforms or direct plans. “It’s not just about overlapping funds—it’s about messaging,” one distributor said, requesting anonymity. “If SIPs or STPs are redirected to the new fund without clarity, it could lead to confusion and disappointment.”

Joshi warned that “for newer retail investors, especially on third-party apps, lack of clear communication—even about fund closures—can create serious trust issues.”

Still, some advisors welcomed the flexibility the framework offers. Santosh Joseph of Germinate Investment Services said the move acknowledges investor preferences. “Some want stability in large funds, others prefer agility in smaller ones. This gives AMCs room to meet both types of needs.”

SIP Continuity a Key Risk

A major concern remains the impact on ongoing Systematic Investment Plans (SIPs) in the original scheme if it stops accepting inflows.

“Many international funds stopped fresh inflows but allow existing SIPs to continue. I expect a similar framework here,” Joshi said, warning that halting SIPs midway could disrupt investor discipline. “Telling an investor they can’t continue their SIP after years of contribution could really upset planning.”

Joseph agreed, saying the mechanism is not fully clarified yet, but “logically, SIPs should continue unless investors are asked to re-register. Once the first such second scheme is launched, the industry will know how to handle it.”

Despite the divide in opinion, all parties agreed that SEBI must ensure crystal-clear communication to prevent investor confusion. The feedback window remains open until August 8.