Sebi revamps MF categorisation; introduces Life Cycle Funds, scraps Solution-Oriented Schemes

The Securities and Exchange Board of India (Sebi) on Thursday unveiled a revamped framework for the classification of mutual fund schemes, introducing Life Cycle Funds, discontinuing the Solution-Oriented Schemes category, and tightening disclosure and portfolio overlap norms to enhance uniformity and investor protection. 

The move is aimed at ensuring “true-to-label” positioning and curbing exaggerated return claims in scheme names, as the regulator seeks to align the mutual fund architecture with the evolving investment landscape and emerging opportunities across asset classes. 

In its circular, Sebi broadly classified schemes into five categories — equity, debt, hybrid, life cycle, and other schemes — along with Fund of Fund (FoF) schemes and passive schemes such as Index Funds and Exchange Traded Funds (ETFs). 

“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,” Sebi said. 

It further stated that words or phrases highlighting only the return aspect of a scheme will not be permitted in scheme names. The “type of scheme” description in offer documents and advertisements must strictly adhere to the prescribed format. 

Nitin Agrawal, CEO – Mutual Funds at InCred Money, said the discontinuation of solution-oriented funds was a significant step. 

“Solution-oriented funds take a hit. We believe most of these funds were not true to label, as portfolio construction was largely similar to other categories and did not provide a differentiated solution. Life Cycle Funds are a welcome move as they promote goal-based investing through a glide path approach, aligning time horizon and risk profile effectively,” he said. 

Agrawal added that the introduction of portfolio overlap disclosures is a “masterstroke,” though operationally intensive. “Portfolios will now need to be more closely aligned with their end-product category rather than being broadly diversified. Monthly overlap disclosures will enhance transparency and help investors avoid over-diversification across schemes with similar underlying exposure,” he noted. 

He also said sectoral debt funds could help deepen the debt market by channelising flows into growth sectors. 

Discontinuation and transition 

As per the circular, 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 other schemes having similar asset allocation and risk profiles, subject to Sebi’s prior approval. 

Sebi also clarified that foreign securities will no longer be treated as a separate asset class. 

Introduction of Life Cycle Funds 

The regulator has 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 (ETCDs), and Gold/Silver ETFs. Allocation to equity will progressively reduce as the scheme approaches maturity, while debt allocation will increase. 

For Index Funds and ETFs, at least 95% of total assets must be invested in the securities of the index being tracked. These will remain open-ended schemes replicating specific indices. 

Similarly, FoFs, whether domestic or overseas, must invest a minimum of 95% of their assets in underlying funds. For FoFs with multiple underlying schemes, the framework issued on June 30, 2025, will apply. 

Stricter norms and disclosures 

Sebi has capped debt exposure for maturities below five years to AA and above-rated instruments with residual maturity below the scheme’s target maturity. 

Mutual funds are now required to disclose category-wise portfolio overlap — such as equity vs equity schemes, debt vs debt schemes and hybrid vs hybrid schemes — on their websites every month. 

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 imposed limits on the number of FoFs that an asset management company can launch across domestic, overseas, hybrid, debt, equity, commodity and thematic categories. Clear naming norms have been prescribed for active, passive and omni FoFs, including diversified, sectoral, country-specific, region-specific and domestic-and-overseas variants. 

Following the circular, mutual funds will need to modify scheme nomenclature, investment objectives, strategies, benchmarks and related parameters to align with the revised categories. Sebi clarified that these changes will not be treated as fundamental attribute changes. All existing schemes must comply within six months from the date of issuance of the circular, the regulator said.