New debt mutual fund classification rules 2026: What changes for investors

A revised framework for classifying mutual fund schemes, including debt funds, was released by markets regulator Sebi in a circular dated February 26, 2026. While most core duration bands remain intact, the regulator has introduced structural refinements, renamed certain categories, and added a new debt segment.

Full List of Debt Scheme Categories Under the New Circular

Under the revised framework, debt schemes are defined as mutual fund schemes predominantly investing in debt and debt-related instruments. The categories are:

What’s new in the 2026 circular

The addition of a new category, the Sectoral Debt Fund, is among the most significant modifications. The updated regulations require that these schemes invest a minimum of 80% of their total assets in sector-specific debt instruments, which are restricted to corporate bonds with ratings of AA+ and above. Financial services, energy, infrastructure, housing, and real estate are among the industries that are permitted.

This category did not exist under the earlier 2024 framework, making it the most substantive addition.

Another key change is the renaming of several debt categories, though their underlying Macaulay duration bands remain largely unchanged. The former "Dynamic Bond Fund," for instance, is now known as the "Dynamic Term Fund." "Ultra Short to Short Term Fund" is the new name for the "Low Duration Fund."

Likewise, funds that were formerly designated as "Short Duration," "Medium Duration," "Medium to Long Duration," and "Long Duration" have been renamed as "Short Term," "Medium Term," "Medium to Long Term," and "Long Term," respectively. Additionally, the "Floater Fund" category is now known as the "Floating Interest Rate Fund." Rather than changing investing requirements, these modifications are mainly intended to improve clarity and standardise terminology.

3. The new framework also explicitly clarifies that most debt schemes, except very short-duration categories such as Overnight, Liquid, Ultra Short, Low Duration (now Ultra Short to Short Term), and Money Market Funds, may invest residual portions in InvITs, subject to regulatory ceilings. This clarification was less structured in the earlier framework.

All categories' core Macaulay duration bands remain unchanged. Corporate bond funds are still required to allocate at least 80% of their investments to corporate bonds rated AA+ and above. A minimum of 65% of Credit Risk Funds must still be allocated to AA and lower-rated corporate bonds (AA+ excluded). PSU and Banking Debt Funds, Gilt Funds, Constant Maturity for 10 Years.

Floating rate strategies and gilt funds continue to adhere to fundamental asset allocation standards. For overnight funds, the 5% deployment allowed in G-secs or T-bills for margin purposes is still in effect.

In its circular, Sebi has broadly classified schemes into five categories. Those are equity, debt, hybrid, life cycle and other schemes. Fund of Fund Schemes and Passive Schemes such as Index Funds or ETFs (exchange traded funds).

"For easy identification by investors, to bring uniformity in names of schemes for a particular category across mutual funds and to ensure that schemes remain 'true to-label', the scheme name shall be the same as the scheme category," Sebi said.

Disclaimer: This article is written purely for informational purposes and should not be considered investment advice from Upstox. Investors should do their own research or consult a registered financial advisor before making investment decisions.