When the Securities and Exchange Board of India (SEBI) ushered in its mutual fund categorisation norms in 2017, its intent was to ensure standardisation and truthful labelling in mutual funds (MFs), while discouraging scheme proliferation. It succeeded in the first two but failed in the third. Therefore, it is moot if SEBI’s latest changes to its categorisation norms will prove effective in rationalising the 2,000-odd MF schemes.
SEBI’s new circular contains both minor and major tweaks. Minor changes include equity and hybrid funds being allowed to park residual funds in gold and silver instruments and Infrastructure Investment Trusts (InvITs). Gold can act as an effective hedge against equity volatility, but it is difficult to explain why silver, which is just as volatile as equities, would be a desirable addition to stock portfolios. The addition of InvITs, though, offers diversification benefits. In a bid to discourage sectoral/thematic fund launches, SEBI will now require fund houses to ensure that overlaps between their sector/theme funds and other equity funds never exceed 50 per cent. Fund houses have been given three years to comply. This is a welcome deterrent against the proliferation of me-too equity schemes.
But while SEBI has barred the gate on sectoral equity launches, it has significantly opened a new one for debt funds. Norms so far required debt funds to cap their single sector exposure to 25 per cent. Now SEBI has allowed fund houses to roll out single-sector debt funds in bonds rated AA+ and above. However, episodes such as the IL&FS and Dewan Housing Finance defaults, tell us that when a well-known entity in a sector defaults, the bond market instantly prices in higher credit and liquidity risks for all other players, irrespective of their credit ratings. It is important that investors be warned about contagion risks.
SEBI has decreed that AMCs can no longer accept subscriptions in solution-oriented funds and merge them into other schemes. This seems harsh. Though solution-oriented funds are no different from hybrid funds, they allowed less-aware investors to save towards goals such as children’s education and retirement without having to take asset allocation calls. Abruptly winding up these popular funds and merging them with open-end funds which carry higher churn, will inconvenience investors. For goal-based needs, SEBI has mooted a new MF category of ‘Lifecycle funds’ with tenures ranging from 5 to 30 years. With the ability to automatically shift their asset mix as they approach maturity, lifecycle funds may be tax-efficient vehicles for investors looking to save towards long-term goals. However, they are complex products. It also seems unnecessary for the regulator to prescribe their precise asset allocation patterns and mandate heavy exit loads (1 to 3 per cent) on them. Overall, these changes may see fund houses cutting back on their thematic equity launches, only to fill the gap with new lifecycle and sectoral debt offerings.
Published on March 4, 2026