The recent revamp of mutual fund regulations by the Securities and Exchange Board of India (Sebi) will serve as a structural reset for the sector, industry experts said, even as some flagged potential transitional challenges for asset managers.

Under the revised framework, Sebi has introduced a new classification structure for mutual fund schemes, creating five broad categories — equity, debt, hybrid, life cycle, and other schemes — in addition to Fund of Funds (FoFs) and passive schemes such as index funds and exchange-traded funds (ETFs). 

The key upsides and downsides for retail investors

Nitin Agrawal, CEO, Mutual Funds at InCred Money, told Fortune India that the reforms carry both positives and operational constraints. 

Among the key positives, he highlighted the 50% portfolio overlap rule for thematic schemes, which he said should now deliver genuine diversification rather than a mere perception of it. He added that the introduction of Life Cycle Funds is likely to encourage authentic goal-based investing behaviour while enhanced disclosure norms will improve transparency for investors. 

On the downside, Agrawal noted that implementing the operational overhaul within a defined timeline could divert management bandwidth towards non-core activities. He described the discontinuation of solution-oriented schemes as more of a rationalisation than a disruption, saying it promotes goal-based investing aligned with investor behaviour and risk profiles. 

“Over the long term, the framework provides a more robust and transparent structure, which is a definite win for retail investors,” he said. 

Hemant Sood, Managing Director at Findoc, described the revamp as one of the most significant structural changes in India’s mutual fund industry. He said that by replacing solution-oriented schemes with scientifically designed Life Cycle Funds based on glide path investing strategies across equities, debt, gold and InvITs, Sebi has shifted goal planning from sentiment-driven decisions to strategy-led allocation. 

“This move is clearly investor-friendly and discipline-oriented, aligning mutual fund investments with real-life financial goals rather than short-term market timing,” Sood said. 

He added that the “true-to-label” requirement and restrictions on portfolio overlaps are important steps towards stronger investor protection and transparency. While the transition may create short-term ambiguity for some investors, Sood said the long-term benefits are evident in the form of improved clarity, structured diversification and more effective goal-based wealth creation. 

However, he cautioned that Life Cycle Funds are designed for long-term commitment and disciplined investing, not short-term profit booking. If implemented effectively by asset management companies (AMCs), he said, these funds could emerge as one of the most structured and impactful goal-based investment tools in India’s mutual fund landscape.

Scheme names must correspond strictly to respective categories: Sebi

To ensure uniformity and “true-to-label” positioning, Sebi has mandated that scheme names must correspond strictly to their respective categories. Words or phrases that focus only the return aspect of a scheme will not be permitted in its name. The “type of scheme” description in offer documents and advertisements must also follow Sebi’s prescribed format. 

The Solution Oriented Schemes category has been discontinued with immediate effect. Existing schemes under this category will stop accepting fresh subscriptions and will be merged with schemes having similar asset allocation and risk profiles, subject to prior regulatory approval. 

Sebi has clarified that foreign securities will no longer be treated as a separate asset class. It has also introduced Life Cycle Funds as open-ended schemes with a pre-determined maturity and a glide path strategy for goal-based investing across equity, debt, InvITs, exchange-traded commodity derivatives and gold or silver ETFs. Under this structure, equity allocation reduces progressively as the scheme nears maturity, while debt allocation increases. 

For index funds and ETFs, at least 95% of total assets must be invested in the securities of the index being tracked. 

MFs will now be required to disclose category-wise portfolio overlap levels 

To enhance transparency, mutual funds will now be required to disclose category-wise portfolio overlap levels — such as equity versus other equity schemes, debt versus other debt schemes and hybrid versus other hybrid schemes — on a monthly basis. Portfolio overlap will be calculated at the ISIN level by summing the minimum weight of each common security held between two schemes as a percentage of assets under management. 

The regulator has also standardised naming conventions and capped the number of FoFs that an AMC can launch across domestic, overseas, hybrid, debt, equity, commodity and thematic categories, prescribing clear definitions for active, passive and omni FoFs. 

Mutual funds will be required to align scheme nomenclature, investment objectives, strategies and benchmarks with the revised framework. These changes will not be treated as fundamental attribute changes, and all existing schemes must comply within six months from the issuance of the circular, Sebi said.