SEBI’s New Mutual Fund Rules Explained: How will they affect your portfolio?

Market regulator Securities and Exchange Board of India (SEBI) has issued a fresh circular revising certain mutual fund rules, mainly to bring greater clarity and uniformity in product categorisation. The changes are aimed at removing overlaps between schemes, refining definitions and introducing a few new categories.

In an interaction with Zee Business, A Balasubramanian, MD & CEO of Aditya Birla Sun Life Mutual Fund and former chairman of the Association of Mutual Funds in India, said the new circular is largely incremental and focused on interpretation rather than a complete overhaul of the system.

“This is not something completely new. Earlier, SEBI had categorised mutual fund products. Now they have gone further into details, wherever there were overlaps or different interpretations. The idea is to bring uniform clarity,” Balasubramanian said.

What has changed?

According to him, around 90 per cent of the earlier framework continues, while about 10 per cent has been fine-tuned.

One of the key areas of clarification relates to fund categories such as value funds and contra funds. “There is a fine difference between a value fund and a contra fund. Contra is not always value investing, and value investing is not always contra. These kinds of distinctions have now been clarified,” he said.

The regulator has also introduced certain new categories, including age-based or life-cycle oriented allocation structures, where equity exposure can be structured around an investor’s age profile. Under the new framework, such schemes may have around 60 per cent exposure to equity, with the balance in other asset classes.

Globally, life-cycle funds are a large category. In India, such allocation was largely available through fund-of-funds structures or solution-oriented schemes like retirement and children’s funds. The latest changes provide more defined structures within the regulatory framework.

Balasubramanian said the impact on investors is expected to be minimal.

“For investors, there is nothing significant that changes immediately. From a money management point of view, portfolio allocation definitions become more uniform. That is the main difference,” he said.

He added that SEBI has given mutual fund houses up to six months to align portfolios and reposition schemes wherever required. In case of overlapping schemes, some mergers may take place.

“Few schemes here and there may get merged. But overall, it should not cause major inconvenience either to investors or to the industry,” he said.

For example, if an asset management company currently runs two similar sectoral schemes with overlapping mandates, it may consolidate them into one. For an investor holding units in one of the merged schemes, the units would typically get mapped into the surviving scheme without requiring fresh action.

Earlier, retirement funds and children’s funds were run as separate solution-oriented categories. With the introduction of more structured age-based allocation categories, inflows into some older formats may be restricted.

Balasubramanian said certain existing schemes may be grandfathered, meaning existing investors can continue, but fresh inflows could be stopped after a transition period.

“Time has been given for implementation. In some cases, inflows may be stopped. But existing investors are protected,” he said.

Another significant update relates to sector-specific schemes, particularly in areas such as financial services.

Balasubramanian explained that earlier, there were exposure caps within sector definitions. For example, limits existed on how much a fund could allocate to financial sector entities as a whole, and sometimes within sub-segments.

Under the revised framework, a mutual fund can launch a scheme investing exclusively in a single sector, such as financial services, subject to single-security limits. As per norms, exposure to a single security cannot exceed 12 per cent of the scheme’s assets.

“This gives flexibility. Earlier, due to sector caps, fund managers sometimes had to invest in other sectors even if opportunities were better in one sector. Now, exclusive sector funds can be structured more clearly,” he said.

Consider Ramesh, a 35-year-old salaried professional investing through a systematic investment plan (SIP) in a multi-cap fund and a retirement-oriented fund.

Under the revised rules, the multi-cap fund will continue to invest across large, mid and small-cap stocks as per defined allocation norms. The key difference is that the category definition is now more tightly interpreted across fund houses. This reduces the risk of one multi-cap fund behaving very differently from another in terms of mandate.

If Ramesh is investing in a retirement fund that falls under a category being restructured, the fund house may stop new subscriptions in that specific format and may either reposition it or migrate investors to a revised structure. However, his accumulated corpus remains invested and managed as per the updated mandate. He does not need to redeem unless he chooses to.

Similarly, consider Meena, who invests in a financial services sector fund. Under the new rules, such a fund can now have clearer, exclusive exposure to financial sector companies, without earlier sectoral caps within that theme. However, the 12 per cent cap on a single stock ensures diversification within the sector.

Balasubramanian said one of the main objectives is to reduce varied interpretations across fund houses.

“In our industry, sometimes interpretation varies from one fund to another. Market narratives also change. This circular clarifies things very clearly. It brings uniformity,” he said.

For investors, this means that when they choose a value fund, a contra fund, a multi-cap fund or a sector fund, they can expect the mandate to be applied in a more standardised way across the industry.

Experts say investors need not rush to make changes solely because of the regulatory update.

• If you are a long-term investor:
• Review whether your scheme’s objective changes materially after repositioning.
• Track communication from your fund house regarding mergers or changes in fundamental attributes.
• Continue SIPs unless there is a clear mismatch with your financial goals.

The broader structure of equity, debt and hybrid funds remains intact. The changes are more about fine-tuning definitions and allowing product innovation within guardrails. As Balasubramanian summed up, “For investors, there is no major impact. But there will be better clarity on what each fund category stands for.”

Market regulator Securities and Exchange Board of India (Sebi) on Thursday unveiled a revamped framework for classification of mutual fund schemes, introducing a new Life Cycle Funds category and scrapping the existing Solution Oriented Schemes segment.

The regulator said the move is aimed at ensuring “true-to-label” positioning of schemes, curbing exaggerated return claims in scheme names and enhancing uniformity and investor protection.

Under the revised structure, mutual fund schemes have been broadly classified into five main categories — equity, debt, hybrid, life cycle and other schemes — along with Fund of Fund schemes and passive schemes such as index funds and exchange-traded funds (ETFs).