SEBI eyeing key changes in how some mutual funds operate

The Securities and Exchange Board of India (SEBI) has released a circular proposing significant reforms to simplify and rationalise mutual fund schemes, making them more transparent and investor-friendly.

The proposals, open for public feedback until August 8, 2025, aim to streamline fund categorisation, enhance asset allocation flexibility and prevent excessive portfolio overlap among schemes.

The recommendations

• One of the key recommendations is to allow asset management companies (AMCs) to operate both Value and Contra funds, a combination that was previously restricted. To ensure meaningful differentiation, SEBI has proposed that the portfolio overlap between the two schemes must not exceed 50 per cent.
• Similarly, for sectoral and thematic funds, SEBI has suggested that no more than 50 per cent of their portfolios may overlap with other equity schemes in these categories, except for large-cap schemes.
• Another major proposal is the expansion of residual allocation options. Currently, equity-oriented funds are required to invest at least 65 per cent of their corpus in equities and option to invest the remaining in debt or money market instruments. SEBI now said that this residual portion can also include alternative assets such as gold, silver, REITs and InvITs.
• For debt funds (except short-duration schemes), SEBI is also considering permitting exposure to REITs and InvITs, which could offer better diversification and risk management.
• Additionally, SEBI has proposed the introduction of sectoral debt funds, which must allocate at least 80 per cent of their total assets to debt and debt-related instruments within a specific sector, restricted to AA+ and above-rated corporate bonds.
• For medium-term and medium to long-term funds, the underlying characteristics will remain unchanged under normal conditions. However, fund managers may reduce the portfolio duration by up to one year if they anticipate adverse interest rate movements. Such adjustments must be clearly disclosed in the fund’s offer documents.
• SEBI has also proposed guidelines for Life Cycle Fund of Funds (FoFs), allowing mutual funds to launch these schemes every five years, with a maximum tenure of 30 years. Upon reaching the target date, a scheme may be merged with the nearest maturity Life Cycle FoF, subject to unitholder’s  consent.
• The circular introduces a framework for launching additional schemes within the same category but with strict conditions to avoid duplication. AMCs may launch an additional scheme only if the existing scheme is over five years old and has an AUM exceeding Rs 50,000 crore.

The new scheme must share a similar investment objective and strategy, and the existing scheme will cease accepting new subscriptions once the additional scheme is launched. The total expense ratio (TER) of the new scheme will be capped at the level last disclosed by the existing scheme at the time of its NFO.

The circular will take effect immediately upon its issuance, and all existing schemes must comply and realign with its provisions within six months.

Also read: SEBI wants gold, silver ETFs valued at domestic spot prices