MUMBAI: The markets regulator Sebi has revamped the framework for classification of mutual fund schemes, introducing ‘life cycle funds’, scrapping the ‘solution-oriented schemes’ category and tightening the disclosure and overlap norms to enhance uniformity and investor protection.
The Sebi circular issued Thursday, which is aimed at ensuring "true-to-label" positioning and curbing exaggerated return claims in scheme names, comes as the regulator seeks to align the regulatory architecture with the evolving mutual fund landscape and emerging opportunities across asset classes.
The new circular broadly classifies mutual fund schemes into five categories -- equity, debt, hybrid, life cycle and other schemes like fund of funds and passive funds such as index funds or exchange traded funds.
For investors to easily identification the schemes, the regulator has sought to bring in uniformity in names of schemes for a particular category across funds.
"For easy identification by investors and to bring in uniformity in names of schemes for a particular category across mutual funds and to ensure that schemes remain 'true to-label', the scheme name shall be the same as the scheme category," Sebi said in the circular.
Words/phrases that highlight/emphasize only the return aspect of the scheme shall not be used in the name of the scheme," it said further, adding the "type of scheme" description in the offer document and advertisements must strictly follow Sebi-prescribed format from now on.
The industry has welcomed the changes and new classification. “These are welcome changes. Sebi has addressed key issues such as portfolio overlap across funds. The introduction of life cycle funds 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, a senior vice-president at Edelweiss Mutual Fund.
Nikunj Saraf, chief executive at Choice Wealth, on the other hand said the new classification rules are a meaningful step towards simplifying an industry that had become increasingly complex for retail investors.
“By clearly defining categories across equity, debt, hybrid and solution-oriented funds and setting uniform asset allocation boundaries, Sebi is ensuring that schemes truly reflect what they claim to be. This reduces overlap, improves comparability and brings much-needed transparency to product positioning," he added.
According to the circular, while the category of solution-oriented schemes has been discontinued with immediate effect, existing schemes under this category will stop accepting fresh subscriptions and merge with other schemes having similar asset allocation and risk profiles subject to Sebi approval.
The newly introduced life cycle funds will be open-ended schemes with a pre-determined maturity and a glide path strategy for goal-based investing across equity, debt, Invits, ETFs and gold/silver ETFs. These funds can be structured across different target maturities ranging from five years to 30 years allowing investors to choose a fund aligned to their retirement horizon, Avasthi said.
For index funds and ETFs, at least 95% of total assets are required to be invested in securities of the index being replicated or tracked. These will be open-ended schemes tracking a specific index, Sebi said.
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.
Sebi also said foreign securities will no longer be treated as a separate asset class.
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.
Broadening the residual investing segment, Sebi has made another important shift, granting flexibility in residual allocations by allowing 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.
In another notable change, Sebi has permitted fund houses to run both value and contra funds simultaneously, something earlier constrained in practice but with a strict condition that portfolio overlap between the two cannot exceed 50%. As the circular states, mutual funds may offer both strategies “subject to the condition that scheme portfolio overlap… shall not be more than 50%.”
Bringing thematic funds under tighter scrutiny, Sebi has capped portfolio overlap at 50% 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. For investors, the change may feel gradual. But structurally, the close to Rs 82 trillion mutual fund industry is being nudged towards a simpler promise that what a fund says it does should closely match what it owns.
Meanwhile, Sebi has also changed gold, silver valuation norms for mutual funds. The move comes amidst the massive fluctuation in the prices of these precious metals in recent weeks after the historic rally in the previous months.
Sebi directed mutual funds to use domestic stock exchange spot prices to value their physical gold and silver holdings from April 1, 2026.
Mutual funds may now use polled spot prices from recognized stock exchanges that settle physically delivered gold and silver derivatives contracts, ensuring that valuations reflect domestic market conditions, Sebi said in a circular Thursday.
The change moves away from the currently used London Bullion Market Association prices to arrive at the valuation of gold and silver held by exchange traded funds.
“Going forward, polled spot prices published by recognized stock exchanges may be used for valuation of gold and silver held by mutual fund schemes. As stock exchanges are subject to transparency and compliance requirements under the regulatory framework, using the spot price published by such regulated entities shall lead to valuation reflective of domestic market conditions and also ensure uniformity in the valuation practices,” Sebi said in the circular.
The spot polling mechanism shall comply with the spot polling guidelines as specified by Sebi from time to time it said, adding Amfi in consultation with Sebi shall prescribe a uniform policy in this regard.