Sebi's major MF revamp: Proposes allowing AMCs to launch 2nd scheme in same category — 5 key changes

Capital market regulator Sebi, in its latest draft circular, has proposed a major revamp of mutual fund scheme categorisation and rationalisation norms, which aims to improve clarity, introduce new schemes and address the issue of overlap among scheme portfolios. The draft circular has been released for public consultation, for which comments have been sought until August 8, 2025, via Sebi's web portal. Sebi has said the existing schemes will realign with the circular within 6 months from its issuance.

What are 5 key proposals on additional schemes?

1. As per Sebi's draft circular, an AMC, at its discretion, can now launch an additional scheme in the existing scheme categories if the existing scheme in the category has completed more than 5 years.

2. The existing scheme should have an AUM of over ₹50,000 crore. The additional scheme will have similar investment objectives, investment strategies, asset allocation, and broad features to the existing scheme. An AMC must release a separate scheme information document.

3. Additionally, upon the launch of an additional scheme, the existing scheme should stop accepting subscriptions. AMC may appoint a separate fund manager for the additional scheme, and it should follow the same disclosures related to performance, expense ratio, and other regulatory requirements as the existing scheme.

4. The total expense ratio of the additional scheme should be capped at the TER (Total Expense Ratio) as last disclosed by the existing scheme on the date of the NFO of the additional scheme. It should also use similar nomenclature to the existing scheme to maintain true-to-label status and avoid confusion in the mind of the investors, e.g., Large Cap Fund (Existing Scheme or Series 1) and Large Cap Fund (Series 2 or Additional Series).

5. The guidelines also suggest that AMC can merge an existing scheme with an additional one if there is a significant decline in the AUM of the former, making it operationally unfeasible or necessitating transitional adjustments for effective management. AMC will ensure no more than two schemes exist in the same category at any point in time, the regulator clarifies.

Why is Sebi bringing these changes now?

Sebi, in its October 6, 2017, circular, along with its November 6, 2020, circular on “Categorisation and Rationalisation of Mutual Fund Schemes” had standardised the scheme categories and characteristics to bring uniformity, improve comparability, and enhance investor understanding.

Since then, the mutual fund industry has grown significantly, both in terms of assets under management (AUM) and investor participation, accompanied by evolving investor preferences, diversification of asset allocation strategies, and the emergence of new investment avenues such as REITs/InvITs.

Considering this, and based on representations received from the industry and AMFI, Sebi says a need was felt to review the categorisation circular to allow flexibility for product innovation while maintaining investor protection and scheme clarity.

While checking possible overlap among the portfolios of various schemes, Sebi noted that in some schemes, there was a significant overlap of portfolios, and it was felt necessary to introduce clear limits to avoid schemes with similar portfolios.