SEBI Revamps Mutual Fund Classification Framework, Introduces Life Cycle Funds and Tightens Disclosure Norms

New Delhi, February 26: The Securities and Exchange Board of India has unveiled a comprehensive overhaul of the mutual fund classification framework, introducing a new category of Life Cycle Funds, discontinuing Solution Oriented Schemes, and tightening disclosure as well as portfolio overlap norms to enhance uniformity and investor protection.

The regulator said the changes are aimed at ensuring schemes remain true to their stated objectives and curbing exaggerated return claims in scheme names. The move aligns the regulatory architecture with the evolving mutual fund landscape and emerging opportunities across asset classes.

Five Broad Scheme Categories Introduced​

Under the revised structure, mutual fund schemes have been classified into five broad categories: equity, debt, hybrid, life cycle, and other schemes. The “other schemes” category includes Fund of Fund Schemes and passive strategies such as Index Funds and ETFs.

To ensure clarity and comparability, SEBI has mandated that scheme names must match the prescribed category. Words or phrases that emphasize only the return aspect will not be permitted in scheme names. The description of the “type of scheme” in offer documents and advertisements must strictly follow the regulator’s prescribed format.

Solution Oriented Schemes Discontinued​

The Solution Oriented Schemes category has been scrapped with immediate effect. Existing schemes under this category will stop accepting fresh subscriptions and will be required to merge with other schemes having similar asset allocation and risk profiles, subject to prior regulatory approval.

In another significant change, foreign securities will no longer be treated as a separate asset class.

Life Cycle Funds for Goal-Based Investing​

SEBI has introduced Life Cycle Funds as open-ended schemes with a pre-determined maturity and a glide path strategy for goal-based investing. These funds can invest across equity, debt, InvITs, ETCDs, and Gold or Silver ETFs.

As the scheme approaches maturity, equity exposure will reduce progressively, while allocation to debt will increase. Life Cycle Funds can be structured across different target maturities ranging from five years to 30 years, allowing investors to align investments with long-term goals such as retirement.

Stricter Norms for Index Funds, ETFs and FoFs​

Index Funds and ETFs will be required to invest at least 95 percent of their total assets in securities of the index being replicated or tracked. These schemes will be open-ended and track a specific index.

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

For debt exposure in schemes with maturities below five years, investments must be limited to AA and above rated instruments with residual maturity below the scheme’s target maturity.

Monthly Disclosure of Portfolio Overlap​

Mutual funds will now have to disclose category-wise portfolio overlap levels on their websites every month. This includes overlap across equity, debt, and hybrid schemes.

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 standardized naming conventions and placed limits on the number of FoFs an asset management company can launch across categories including domestic, overseas, hybrid, debt, equity, commodity, and thematic segments. Clear naming rules have been prescribed for active, passive, and omni FoFs.

Mutual funds must modify scheme nomenclature, investment objectives, strategies, benchmarks, and related parameters to align with the revised framework. These changes will not be treated as fundamental attribute changes.

All existing schemes are required to comply within six months from the date of issuance of the circular.