The disease of featuritis returns

Eight years ago, when SEBI first rationalised mutual fund categories, I wrote that it was a good idea executed imperfectly. The 2017 circular reduced the chaos of overlapping schemes into 36 categories. In practice, the total number of funds fell by just 29. Fund companies found ways to fit existing products into new boxes without changing much. It was like rearranging the furniture and calling it renovation.

Today, SEBI has issued a sweeping circular that supersedes the entire framework. Parts of it made me genuinely happy. Other parts made me reach for the calculator to count how many new NFOs the industry would launch by Diwali.

Let me start with the good. SEBI has killed Solution-Oriented Schemes. Dead. Subscriptions stopped immediately. I have been saying for years that retirement funds and children's funds were a labelling exercise dressed up as a category. A rupee invested in a "retirement fund" is no different from a rupee in a balanced fund. Your mutual fund doesn't know whether you'll spend the money on retirement or a trip to Ladakh. It took SEBI eight years, but they got there. Main khush hoon.

The portfolio overlap restriction on sectoral and thematic funds is equally welcome. No sectoral or thematic fund can now have more than 50 per cent overlap with other equity schemes, computed quarterly from daily values. Existing schemes get three years to comply or merge. This targets a problem I've watched grow for years – thematic funds barely distinguishable from diversified schemes. An "infrastructure theme" fund whose top holdings are Reliance, L&T, and ICICI Bank isn't meaningfully different from a large-cap fund. Now, companies must prove the difference with actual portfolio data. This has teeth.

The true-to-label naming rule is overdue, too. No more "opportunities" and "wealth creators" in scheme names. Are you a flexi-cap fund? Call yourself one.

Now, what worries me.

This circular doesn't simplify. It expands. We now have Sectoral Debt Funds – corporate bonds from specific sectors such as Financial Services, Energy, and Infrastructure. For the retail investor already confused by 17 debt categories, adding sectoral options is like solving a cluttered wardrobe by buying a bigger one.

Then there are Life Cycle Funds, target-date funds with glide paths, multiple asset classes, and up to six per AMC. Conceptually sound. A fund that automatically shifts from equity to debt as you approach your goal is genuinely useful. But I've seen what this industry does with sound ideas. It manufactures them at scale, markets them aggressively, and moves on. With 40-odd AMCs each launching 6 life-cycle funds, we could have 240 funds in the market. The product designed to simplify investing becomes another source of the question, "Which one should I pick?"

The Fund of Funds framework is a regulatory masterwork, with six broad categories, three options each, region-specific lists, and nomenclature rules running into pages. I challenge any retail investor to read "XYZ Domestic and Overseas Diversified Equity All Cap Omni FOF" and feel that investing has become simpler.

The fundamental tension in mutual fund regulation has always been this: the regulator creates distinct categories so investors can compare meaningfully. The industry creates as many products as the categories permit, because each new product is an NFO, a marketing campaign, a fresh set of commissions. Every time SEBI draws new lines on the map, the industry sees new territory to colonise.

The average Indian investor needs about four types of funds. A flexi-cap for core equity. A short-duration debt fund for stability. An ELSS for tax saving. Maybe a hybrid fund. Everything else, the sectoral funds, the thematic funds, the credit risk funds, the life cycle funds, the fund of fund of funds, is optional at best and dangerous at worst. This circular has given the industry more optional things to sell.

Two years from now, the test won't be whether compliance paperwork is in order. It will be whether the average investor faces fewer, clearer choices or just more sophisticated clutter. Based on watching this industry for over 30 years, I know which way I'd bet. But I would be very happy to be wrong.

A practical note: SEBI’s redrawing of categories does not reduce clutter. It often expands it. When we examined investor portfolios some time ago, a striking number held more than 20 funds. That isn’t diversification. It’s drift.

If your portfolio has started to resemble a shopping basket assembled over multiple NFO seasons, you likely don’t have a strategy problem. You have an accumulation problem.

Periodic clean-ups are not optional. They are essential.

This is precisely the role of Value Research Fund Advisor. 

See how it works!

It evaluates what you already own and tells you, clearly and without jargon, what to Buy, what to Hold, and what to Sell. Not everything deserves a place in your portfolio simply because it exists.

By eliminating redundancy and overlap, you reduce monitoring fatigue. Fewer funds mean clearer intent. And clearer intent leads to better decisions.

In a market that keeps adding products, progress often begins with subtraction.

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