SEBI Issues New Circular on Mutual Funds: Ensure Schemes Are True to Label
"Portfolio Overlap Is a Masterstroke Though Operationally Intense", says Nitin Agrawal of InCred Money
Mumbai, Feb 26, 2026: The Securities and Exchange Board of India (SEBI), issued its master circular on the Categorization and Rationalisation of Mutual Fund Schemes in India.
As per the circular, SEBI has broadly re-classified the mutual fund schemes under the following categories:
- Equity Schemes: Mutual Fund scheme predominantly investing in equity and equity related instruments;
- Debt Schemes: Mutual Fund scheme predominantly investing in debt and debt related instruments;
- Hybrid Schemes: Mutual Fund schemeinvestingina mix of asset class, i.e. equity, debt, InvITs and commodities related instruments as permitted.
- Life Cycle Funds (new category)
- Other Schemes (including Index Funds, ETFs & Fund-of-Funds)
Nitin Agrawal, CEO of Mutual Funds with InCred Money, said that the following five points come out to be the key takeaway from this circular.
Key Takeaways:
- 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.
- Life cycle funds is a welcome move in a way to promote the investor’s behaviour towards goal-based funds as it follows a glide path towards end-maturity perfectly aligning the time horizon and risk profile
- 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
- Sector Debt funds may help deepen the overall debt market by directing flows to growth sectors
- Monthly Overlap disclosure will also bring in greater transparency in terms of overall exposure across various schemes and will help investors to avoid over-diversification across schemes having similar underlying exposure
He added that the circular not only makes scheme offerings more true to label but also brings in more transparency in terms of mandatory disclosures.
Aim of re-categorisation and rationalisation:
As per Moneycontrol, the SEBI's new framework aims to:
- Simplify and standardize mutual fund scheme categories
- Ensure schemes are “true-to-label” — the actual portfolio must reflect the stated objective and category
- Reduce duplication and portfolio overlap between similar schemes
- Enhance investor transparency and protection across mutual fund products.
What Schemes Are Discontinued and What Introcued
The new circular has discontinued solution-oriented schemes bringing the axe down on Children's Funds and Retirement Funds and has instructed the stakeholders to stop accepting fresh subscriptions and merge the existing portfolios into similar schemes after taking SEBIs approval.
At the same time, the SEBI has introduced a new category by the name of Life Cycle Funds, which is designed for goal based investing that automatically shifts asset allocation over time (from Equity to Debt). The salient features include:
- Open ended schemes with pre-determined maturity within 5-30 years range
- Glide Path Straegy: automatically shift allocation from equity to debt, over time
- Investment across debt, equity, InvITs, ETCDs and Gold & Silver ETFs
- A mutual fund can operate up to 6 Life Cycle Funds at a time
- After taking unit holder consent, the fund can do an auto merger with the next maturity fund when less than a time remains to maturity
- Exit loads encourage longer holding - 3% exit load if redeemed within 1 year, 2% if redeemed within 2 years and 1% if redeemed within 3 years
Disclosure and 'True to Label" Naming
The circular warrants that in order to ensure transparency mutual funds must publish monthly overlap disclosures on their website, viz. Equity vs Equity, Debt vs Debt and Hybrid vs Hybrid. This will allow investors to see how one scheme resembles another. Further, SEBI has tightened the naming rules to ensure that names match the investment category so as not to mislead investors.
The circular has further issued compliance timelines to the stakeholders, which ranges from immediate action to 3 years. Firms must immediately stop accepting fresh appications to solution-oriented schemes, align nomenclature and portfolio definitions in 6 months and allows up to 3 years for firms to meet the overlap norms in the thematic / sectoral schemes.
Conclusion
The SEBI circular of Feb 26 is one of the most significant mutual fund regulatory overhauls in recent years, since it is aimed at making mutual funds easier to understand so that investors can choose wisely. Further, it
- Improves clarity and comparability between schemes
- Prevents product duplication
- Strengthens investor protection and
- Introduces new goal-based investment options
#SEBI #MutualFundReforms #LifeCycleFunds #InvestorAwareness #Udaipur #RajasthanBusiness #MutualFunds #AssetManagement #FinancialMarkets #InvestorProtection #RajasthanInvestors #UdaipurBusiness
To join us on Facebook Click Here and Subscribe to UdaipurTimes Broadcast channels on GoogleNews | Telegram | Signal