New Mutual Fund Rules: In a significant development Security and Exchange Board of India (SEBI) on Thursday introduced a revamped framework for the classification of mutual fund schemes. The market regulator introduced Life Cycle Funds and scrapped Solution Oriented Schemes category, and it tightened disclosure and overlap norms to enhance uniformity and investor protection as well.
In a circular, SEBI broadly classified schemes into five categories – equity, debt, hybrid, life cycle, and other schemes. Equity Schemes are those funds that primarily invest in equity and equity-related instruments.
Funds predominantly investing in debt and debt-related instruments would fall under the debt scheme category, and hybrid schemes are funds investing in a mix of asset classes such as equity, debt, InvITs and commodity-related instruments. The category is Life cycle funds, and all others would come under the Other schemes category, including Fund of Funds and Exchange Traded Fund.
These new changes will apply to all mutual funds, asset management companies (AMCs), trustee companies, and the Association of Mutual Funds in India (AMFI).
The development comes at a time when Sebi is attempting to align its regulatory architecture with the changing mutual fund environment and emerging opportunities in the asset class.
What was the need of new revamp
The market regulator said that it brought the changes for easy identification by investors, in order 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.
Words/ phrases that highlight/emphasise only the return aspect of the scheme shall not be used in the name of the scheme, SEBI added.
Solution-Oriented Schemes Discontinued
Under the new framework, the Solution-Oriented Scheme category has been discontinued from immediate effect. As per sebi circular, schemes in this category will stop accepting new subscriptions and will be merged with other schemes with similar asset allocation and risk profiles, subject to SEBI's prior approval.
Furthermore, foreign securities will no longer be considered a separate asset class.
Life Cycle Fund
The regulator has introduced Life Cycle Funds as open-ended schemes. The schemes will come with pre-determined maturities and a glide path strategy for target-based investments in equity, debt, InvITs, ETCDs, and gold/silver ETFs.
Additionally, Sebi said that as the Life Cycle scheme approaches maturity, the equity allocation will have to decrease gradually, while the debt allocation will increase.
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Index fund regulations tighten
For index funds and ETFs, at least 95 per cent of total assets must be invested in securities of the index being replicated or tracked. These are open-ended schemes that track a specific index.
Similarly, fund of funds (FoFs), whether domestic or foreign, must invest at least 95% of their assets in underlying funds. For FoFs with multiple underlying schemes, the framework issued on June 30, 2025, will apply.
Debt exposure for maturities less than five years should be limited to instruments rated AA and above, with the remaining maturity less than the scheme's target maturity.
What's Next for Mutual Fund Houses
Following the announcement of the new set of rules, mutual funds will be required to change the scheme name, investment objective, strategy, benchmark, and related parameters to reflect the changed category. These changes will not be considered a change in the basic features.
SEBI said that all schemes will have to comply with this circular within six months from the date of its issuance.