SEBI proposes revision of mutual fund schemes categorisation to address overlap in portfolios

Securities and Exchange Board of India (SEBI) on Friday, July 18, proposed to review the categorisation of mutual fund (MF) schemes in order to enhance clarity and deal with the issue of overlap in portfolios of schemes.

SEBI noted a major overlap of portfolios in some MF schemes and said that there is a need to introduce clear and straightforward limits to avoid schemes with similar portfolios. 

As a result, in a consultation paper, the markets regulator suggested that MFs should be permitted to offer both Value and Contra funds with the condition that the schemes' portfolios wouldn’t overlap more than 50% at any point in time. 

This condition must be verified at the time when the scheme’s New Fund Offer (NFO) is launched. After that, it should be monitored subsequently on a semi-annual basis using month-end portfolios.

If there is an overlap of over 50%, the Asset Management Company (AMC) should rebalance the portfolios within 30 business days. Further, an extension of up to an additional 30 business days may be granted by the Investment Committee (IC) of the AMC. The reasons for granting the extra days must be recorded and maintained properly. 

"If the deviation persists beyond this period, investors of both the schemes shall be given an exit option without any exit load," SEBI proposed.

The markets regulator proposed that mutual funds should be permitted to invest the rest of their portfolios in equity, debt (including money market instruments), gold and silver, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs) under the equity category schemes.

Additionally, SEBI recommended revising the nomenclature of debt schemes to make it easier to understand for investors. 

It proposed that the term 'Duration' be replaced with 'Term' for better clarity. 

The 'Low Duration Fund' should be renamed as 'Ultra Short to Short Term Fund' to reflect the investment objective in a better way. Moreover, the name of each debt scheme should depict the fund's duration, such as Overnight Fund (1 Day) or Medium Term Fund (3 to 4 years).

SEBI also proposed that MFs should be allowed to launch sectoral debt funds, with the condition that the portfolio in a sectoral debt scheme should not overlap by over 60% with any other sectoral debt or debt category scheme. This move should also ensure sufficient availability of investment-grade papers within the chosen sectors.

The regulator also suggested that mutual funds should be permitted to invest the residual portion of their debt category schemes in REITs and InvITs, except for those with shorter durations, such as Overnight Fund, Liquid Fund, Ultra-Short Duration Fund, Low Duration Fund and Money Market Fund, subject to regulatory limits applicable to this asset class.

For arbitrage funds, SEBI suggested that such schemes should be allowed to take exposure in debt instruments only through government securities with a maturity of less than a year and in repos backed by government bonds. For equity savings schemes, it proposed that net equity exposure and arbitrage exposure should not be more than 15% to 40%.

In terms of hybrid category schemes, mutual funds should be allowed to invest the residual portion in REITs and InvITs, except in Dynamic Asset Allocation and Arbitrage Funds.

The proposal further said that MFs should be permitted to offer different types of schemes within the solution-oriented category, offering varying mixes of equity and debt components.

SEBI also recommended that mutual funds be allowed to offer solution-oriented life cycle fund of funds (FoFs) with a target date. These schemes could include lock-in features made for specific financial goals such as housing, marriage and other objectives.

Additionally, the schemes may offer different lock-in periods, such as 3 years, 5 years or 10 years, as per the varying needs of investors. 

SEBI also proposed a change in terminology, suggesting that the word 'fund' in scheme names be replaced with 'scheme'. For example, instead of 'Large Cap Fund', it should be referred to as 'Large Cap Scheme'.

Overall, mutual fund offerings would continue to be grouped under five broad categories: Equity-oriented schemes, Debt-oriented schemes, Hybrid schemes, Solution-oriented schemes and Others. 

SEBI has sought public comments on the proposal till August 8, 2025.