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Summary: SEBI’s new proposal could quietly change the very nature of your favourite equity mutual funds. By allowing fund managers to invest up to 35 per cent of the portfolio in gold, REITs, InvITs and debt, even small-cap and flexi-cap funds may begin to look—and behave—a lot like multi-asset funds. So, read on to decode the impact of SEBI’s latest move—and what you should do as an investor.
A small clause in SEBI’s latest proposal could create a big shift in how equity mutual funds behave. While it’s not a reclassification, it may reshape how your mid-cap, small-cap, flexi-cap or even focused funds allocate money.
Let’s break it down.
What has SEBI proposed?
A few days back, SEBI published a proposal where it now wants to allow equity mutual funds to invest their residual portion—the part not mandated to be in equity—into other asset classes like:
- Debt instruments (including money market)
- Gold and silver
- REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts)
While equity funds have always had some leeway to keep a portion of their portfolio in non-equity assets (usually for liquidity and to manage risk), the key change is this: SEBI is formalising and expanding that freedom across more asset types.
So, what is this ‘residual portion’?
Here’s how much of the fund corpus must be invested in equity, and how much is up to the fund manager’s discretion (i.e., residual portion):
| Fund category | Minimum in equity | Residual portion |
|---|---|---|
| Large Cap | 80% | 20% |
| Large & Mid Cap | 70% (35% each) | 30% |
| Mid Cap | 65% | 35% |
| Small Cap | 65% | 35% |
| Flexi Cap | 65% | 35% |
| Value / Contra / Focused | 65% | 35% |
So, if SEBI’s new proposal is implemented, fund managers can invest this residual portion into debt, gold, REITs or InvITs—making a purely equity-labelled fund behave more like a multi-asset fund.
The blurring lines
This raises an important question: will traditional equity funds start to resemble multi-asset allocation funds?
Let’s look at the numbers.
- Multi-asset funds (as per SEBI definition) are required to invest at least 10 per cent each in at least three asset classes. Some of the popular types of asset classes include equity, debt, real estate and gold.
- Out of the 27 multi-asset funds available today, the median equity exposure is around 59.6 per cent. That’s strikingly close to what some frontline equity funds like flexi-cap, mid-cap and small-cap funds are mandated to maintain by law.
Now imagine a flexi-cap or value fund investing 65 per cent in equity and the remaining 35 per cent in debt or gold, as permitted under SEBI’s new proposal. That leaves only a thin line separating these “pure equity” funds from multi-asset funds.
What this means for investors
If the proposal goes through:
- The frontline equity funds’ fundamentals will change. It may no longer be purely equity-driven.
- Fund managers may use the 30–35 per cent flexibility to lower volatility, smoothen returns or manage liquidity.
- This could be great for risk-averse investors, though it could also blur category boundaries.
That said, it’s worth noting that this framework is still under discussion. Fund houses and stakeholders will weigh in, and SEBI may tweak the final guidelines based on feedback. Until then, we suggest you don’t do anything rash for now.
Want to stay ahead of the change?
At Value Research, we don't just track regulatory shifts, we decode what they mean for you, the investor. Whether SEBI’s new rule creates smarter equity funds or more confusion, we’ll help you navigate it with clarity. So, if you want to remain money savvy, we suggest you keep reading our website and subscribe to our blue-ribbon magazine, Mutual Fund Insight.
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Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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