Categorization and Rationalization of Mutual Fund Schemes
India’s mutual fund rulebook has undergone changes. Through its latest circular on categorisation and rationalisation of schemes, SEBI has tweaked categories as it has attempted to reshape how funds are designed and and managed.
“These are welcome changes. SEBI has addressed key issues such as portfolio overlap across funds. The introduction of life cycle funds also resolves the static asset allocation problem seen in traditional retirement products. By aligning risk with different life stages, it helps reduce emotionally driven asset allocation decisions,” said Niranjan Avasthi, Senior Vice President, Edelweiss Mutual Fund.
Goodbye to solution-oriented schemes
One of the biggest changes is the discontinuation of solution-oriented schemes such as retirement and children’s plans. SEBI has scrapped the category altogether, directing that “existing schemes in this category shall stop all subscriptions with immediate effect” and be merged with similar schemes after regulatory approval.
Investors will now likely see consolidation rather than proliferation of goal-labelled products.
“Solution-oriented funds take a hit. We believe that most of the funds were not true to label as the portfolio construction was mainly in line with other funds not providing a more true to label solution to the issue,” said Nitin Agrawal, CEO, Mutual Funds, InCred Money.
Introduction of Life Cycle Funds
Replacing these is a new category called Life Cycle Funds designed to embed discipline directly into asset allocation.
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The circular defines these as schemes following a “glide path strategy based investing across various asset classes” including equity, debt, gold and silver ETFs and InvITs.
These funds will automatically reduce equity exposure as maturity approaches, with tenures ranging from 5 to 30 years.
Residual investing gets broader
Another important shift is the flexibility granted in residual allocations. SEBI has allowed schemes to deploy the non-core portion of portfolios into instruments such as gold, silver and InvITs, subject to regulatory limits. Earlier the residual investment was limited to debt.
This formalises the industry’s gradual move toward multi-asset diversification.
Value and contra funds
In a notable change, SEBI now permits fund houses to run both value and contra funds simultaneously something earlier constrained in practice.
However, the regulator has added a strict condition: portfolio overlap between the two cannot exceed 50 percent. As the circular states, mutual funds may offer both strategies “subject to the condition that scheme portfolio overlap… shall not be more than 50 percent.”
The intent is clear, different strategy names must reflect genuinely different portfolios.
Thematic funds face tighter scrutiny
Perhaps the most investor-relevant reform targets thematic and sectoral funds, which have surged in popularity in recent years.
SEBI has capped portfolio overlap at 50 percent not only across thematic schemes but also with other equity categories (except large-cap funds).
Funds will get a three-year glide path to comply, failing which mergers may be required. The regulator is effectively addressing a long-standing issue: multiple “themes” owning the same set of stocks.
“Portfolio overlap is also a masterstroke though operationally intense. Now the portfolio needs to be more-aligned towards the end product category rather than being a general well-diversified portfolio,” said Agrawal.