Categorization and Rationalisation of Mutual Fund Schemes

Under this circular, the framework for the categorization and rationalization of mutual fund schemes has been inroduced. It supersedes earlier provisions in the mutual fund master circular and introduces updated categories, clearer scheme characteristics, and stricter rules to ensure transparency and consistency across the mutual fund industry.

The circular classifies mutual fund schemes into five broad groups: Equity Schemes, Debt Schemes, Hybrid Schemes, Life Cycle Funds, and Other Schemes such as Index Funds, ETFs, and Fund of Funds (FoFs). Each category has clearly defined investment limits, asset allocation requirements, and uniform scheme descriptions to ensure that funds remain “true-to-label.” For example, equity schemes specify minimum equity exposure and define allocation rules for large-cap, mid-cap, and small-cap funds, while debt schemes are categorized primarily by duration and credit quality of investments. Hybrid schemes combine equity and debt within specified allocation ranges.

The circular also introduces new regulatory features, including the introduction of Life Cycle Funds that follow a glide-path strategy where asset allocation shifts from equity to debt as the investment approaches maturity. At the same time, the earlier solution-oriented schemes category is discontinued, and existing schemes must stop subscriptions and merge with other similar schemes. Additionally, SEBI requires limits on portfolio overlap between schemes (especially sectoral and thematic funds) to prevent duplication and ensure product differentiation. Mutual funds must disclose these overlap levels monthly on their websites.

Finally, the circular mandates uniform naming conventions, updated investment objectives, and alignment of existing schemes with the new categories within six months. The objective is to simplify scheme identification for investors and ensure transparency in scheme design and marketing.