The Securities and Exchange Board of India has overhauled the framework governing categorisation and rationalisation of mutual fund schemes, tightening portfolio overlap norms, standardising nomenclature and discontinuing the solution-oriented schemes category with effect from 26 February 2026.
In a circular issued on 26 February 2026, SEBI superseded Clause 2.6 of Chapter 2 of the Master Circular for Mutual Funds dated 27 June 2024 and introduced revised categories, scheme characteristics and uniform descriptions across equity, debt, hybrid, life cycle and fund of fund segments.
50% overlap ceiling for sectoral and thematic equity schemes
SEBI has mandated that sectoral and thematic equity schemes shall ensure that portfolio overlap does not exceed 50% with other equity schemes in the sectoral/thematic category and other equity scheme categories, except large cap schemes.
Portfolio overlap is to be computed on a quarterly basis using the average of daily overlap values at the individual ISIN level, in accordance with the methodology prescribed in Annexure A of the circular.
Existing sectoral and thematic schemes have been given three years from the date of the circular to comply. Mutual funds must reduce 35% of the excess overlap in the first year, an additional 35% in the second year and the remaining 30% in the third year. Schemes unable to meet the criteria after three years shall be mandatorily merged in accordance with applicable provisions.
Further, mutual funds offering both value and contra funds must ensure that portfolio overlap between the two schemes does not exceed 50%.
Sectoral and thematic funds may be launched only as per the list of sectors and themes published and updated half yearly by the Association of Mutual Funds in India in consultation with SEBI.
Solution-oriented schemes discontinued
The solution-oriented schemes category stands discontinued with effect from 26 February 2026. Existing schemes under this category are required to stop accepting subscriptions with immediate effect and shall be merged with another scheme having similar asset allocation and risk profile, subject to prior approval from SEBI.
Uniform naming and true-to-label requirement
SEBI has directed that, for ease of identification and to ensure schemes remain true to label, the scheme name shall be the same as the scheme category. Words or phrases that highlight or emphasise only the return aspect of the scheme shall not be used in the name.
The 'type of scheme' description appearing in offer documents and marketing material must strictly adhere to the uniform description prescribed in the circular.
Consequent changes to nomenclature, investment objective, investment strategy, benchmark or other parameters to align with the revised categories shall not be treated as fundamental attribute changes. Existing schemes must comply within six months from 26 February 2026.
Life Cycle Funds framework introduced
The circular provides a detailed framework for Life Cycle Funds, defined as open-ended funds with a target date maturity following a glide path strategy across equity, debt, InvITs, ETCDs, Gold and Silver ETFs.
Life Cycle Funds may be launched with a minimum tenure of 5 years and a maximum of 30 years, in multiples of five years. A mutual fund may have a maximum of six such funds open for subscription at any given time. Funds with less than one year to maturity may be merged with the nearest maturity Life Cycle Fund, subject to positive consent from unitholders.
These schemes will follow prescribed asset allocation bands based on years to maturity and will carry graded exit loads of 3% within one year of investment, 2% within two years and 1% within three years.
Debt and hybrid categories retained with safeguards
Duration-based classifications for debt schemes, from overnight to long term funds, have been retained. SEBI clarified that Macaulay duration must be disclosed at the portfolio level.
In respect of medium term and medium to long term funds, fund managers may reduce portfolio duration in anticipated adverse situations in the interest of investors. Such decisions must be recorded with written justification, placed before trustees and reported in the half yearly trustee report to SEBI.
Hybrid schemes continue under conservative, balanced, aggressive, dynamic asset allocation, multi asset, arbitrage and equity savings categories with defined asset allocation ranges. Foreign securities will not be treated as a separate asset class.
Standardised framework for Fund of Funds
Sebi lays down a standardised framework for domestic, overseas and domestic and overseas fund of fund schemes with multiple underlying funds. The framework prescribes categorisation, benchmark construction principles, nomenclature requirements and limits on the number of FoFs that may be launched by an AMC under each category.
Existing FoFs exceeding the permitted number under any category may be grandfathered, but fresh launches beyond the prescribed limits will not be permitted. AMCs are required to align or re-categorise existing FoFs in accordance with the framework.
Monthly disclosure of portfolio overlap
Mutual funds are required to disclose category-wise portfolio overlap levels on their websites on a monthly basis, covering equity schemes versus other equity schemes, debt schemes versus other debt schemes and hybrid schemes versus other hybrid schemes.
What this means for investors
The regulator's message is clear. Schemes must be true to label, product clutter must reduce, and thematic crowding cannot masquerade as differentiation. For investors, it promises clearer categories, cleaner comparisons and fewer look-alike schemes hiding behind creative names. If the 2017 categorisation exercise was about decluttering the shelf, the 2026 reset is about ensuring every product on that shelf actually does what it says on the label.
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