Sebi plans revamp of MF categorisation norms to curb scheme overlap

Sebi proposes a revamp of mutual fund categorisation norms to reduce redundant schemes, allow more fund innovation, and provide flexibility to fund houses while ensuring diversification and better liq

The Securities and Exchange Board of India (Sebi) has proposed a comprehensive overhaul of rules guiding how the ₹75-trillion mutual fund (MF) industry designs its offerings. The redesign — the first since the introduction of categorisation norms in 2017 — aims to curb the mushrooming of near-identical schemes, while giving fund houses room to innovate.

 

In a consultation paper released Friday, Sebi proposed allowing fund houses to launch retirement fund-of-funds (FoFs) with a target maturity strategy, enabling them to attract long-term, pension fund-like money.

 

Fund houses managing schemes exceeding ₹50,000 crore in assets will also be allowed to launch additional schemes in the same category, to address liquidity challenges, particularly in the smallcap and midcap segments.

 

To boost diversification, Sebi plans to permit equity-oriented schemes to invest in gold and silver, expanding beyond their current scope of equity, debt, real estate investment trusts (Reits), and infrastructure investment trust (Invits). The move aims to provide better downside protection during periods of high equity valuations, according to MF officials. 

 

In April, Sebi had also proposed raising the cap on Reit and Invitt exposure from 10 per cent to 20 per cent.

 

To prevent redundant launches, Sebi has introduced a 50 per cent cap on portfolio overlap between sectoral/thematic equity schemes and other equity schemes, excluding largecap funds.

 

This follows a surge in thematic and sectoral schemes, which grew from 149 to 202 in 2024, with passive schemes also rising over 12 per cent, largely in thematic and factor-based categories.   

 

Sebi plans separate regulations to address the proliferation of passive schemes.

 

The regulator has also proposed expanding active equity, hybrid, and debt categories. Fund houses will now be allowed to offer both value and contra schemes (previously limited to one), and both balanced and aggressive hybrid funds. A new sectoral debt fund category, investing over 80 per cent in debt instruments of a specific sector, was also introduced.

 

In the solution-oriented space, Sebi plans to expand the number of permissible schemes from two to six.

 

The proposed retirement FoF category will invest across equity, hybrid, and debt funds, with a life cycle FoF launch permitted every five years, for a maximum tenure of 30 years. 

Expansion, with limits 

• Second scheme allowed if first crosses ₹50,000 cr AUM and is closed to new subscriptions
• Funds may now launch both value and contra schemes
• New Life Cycle FoF category for tailored retirement funds
• No two active funds with over 50% portfolio overlap, except largecap funds
• New debt, solution-oriented categories on the horizon