SEBI announces new equity mutual fund classification rules: What has changed? All you need to know

The Securities and Exchange Board of India (SEBI) on Thursday, February 26, 2026, issued a new circular on “Categorization and Rationalization of Mutual Fund Schemes”.

The new circular has replaced Clause 2.6 of Chapter 2 of the 'Master Circular for Mutual Funds' dated June 27, 2024, which provided for categorisation of mutual fund schemes.

The revised classification rules have increased the mandatory equity allocation for focused, contra, dividend-yield and value funds in the equity mutual fund category. Moreover, the new rules have also mandated fund houses to follow stricter overlapping rules.

For instance, in the sectoral and thematic equity categories, mutual funds are required to ensure that “no more than 50% of the schemes' portfolios would overlap with other equity schemes in sectoral/thematic category and other equity schemes categories except for the large cap scheme.”

There are also changes in rules for other mutual fund categories, which we will cover separately. This article explains everything investors should know about changes in the equity mutual fund schemes.

Overlap calculation

The new circular has mandated the computation of the overlap condition on a quarterly basis. This was not required previously.

“The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values i.e. the average of daily portfolio overlap values over a quarter,” the circular said.

Further, existing sectoral/thematic schemes are required to ensure compliance with regard to portfolio overlap limits within 3 years.

“Schemes unable to meet the portfolio overlap criteria after 3 years shall be mandatorily merged with other schemes as per applicable provisions,” SEBI said.

According to Nikunj Saraf, CEO at Choice Wealth, the new classification rules are a meaningful step towards simplifying an industry that has become increasingly complex for retail investors. "By clearly defining categories across equity, debt, hybrid and solution-oriented funds and setting uniform asset allocation boundaries, the regulator is ensuring that schemes truly reflect what they claim to be. This reduces overlap, improves comparability and brings much-needed transparency to product positioning," Saraf said.

AMCs can offer both Value and Contra Funds

Previously, mutual funds were allowed to offer either a Value Fund or a Contra Fund. However, the new rules allow fund houses to offer both, provided the overlap between the two scheme is not more than 50%.

“Mutual Funds shall be permitted to offer both Value and Contra funds subject to the condition that scheme portfolio overlap between the two schemes shall not be more than 50%,” the new circular says.

13 types of equity schemes

In the new circular, there are 13 types of equity-oriented schemes, compared to just 11 previously. The new circular has separated thematic/sectoral funds that were clubbed together previously. The naming of ELSS schemes has also been changed. Further, the mandatory equity allocation for various schemes have been revised.

Here are the 13 equity mutual fund scheme categories:

Scheme classification: New Life Cycle Funds introduced

A Life Cycle Fund will be a scheme following a glide path strategy based on investing across various asset classes, i.e., Equity, Debt, InvITs, ETCDs, Gold & Silver ETF.

Naming of schemes

The new circular mandates uniform naming and no use of names emphasizing returns.

“Existing sectoral/thematic schemes shall ensure compliance with regard to portfolio overlap limits within 3 years from the date of this circular. Schemes unable to meet the portfolio overlap criteria after 3 years shall be mandatorily merged with other schemes as per applicable provisions,” the circular said.