- 1. Stricter Rules for Equity Funds
- 2. New Rules on Portfolio Overlap
- 3. Introduction of "Life Cycle Funds"
- 4. Discontinuation of "Solution-Oriented" Schemes
- 5. Other Important Changes
- Conclusion
Securities and Exchange Board of India (SEBI) issued a new circular regarding the "Categorisation and Rationalisation of Mutual Fund Schemes."
This new circular replaces the previous guidelines and aims to simplify mutual fund categories, reduce duplication, and ensure that schemes remain "true to label." The regulator has introduced new categories, discontinued others, and tightened the rules regarding where equity funds can invest.
Here is a simple breakdown of the changes and what they mean for investors.
1. Stricter Rules for Equity Funds
SEBI has revised the mandatory minimum investment limits for several equity fund categories. Previously, many funds were required to invest a minimum of 65% in equity. This limit has now been raised to 80% for specific categories to ensure they stay true to their investment objective.
Minimum Equity Allocation Raised to 80%
SEBI has increased the mandatory minimum equity exposure from 65% to 80% for the following categories:
This ensures that these schemes remain truly equity-oriented and aligned with their stated investment objectives.
Other Categories:
- Large Cap Fund: Minimum 80% in large-cap stocks.
- Mid Cap & Small Cap Funds: Minimum 65% in their respective categories.
- Flexi Cap Fund: Minimum 65% in equity.
- Multi Cap Fund: Minimum 25% each in Large, Mid, and Small caps.
- Large & Mid Cap Fund: Minimum 35% each in Large and Mid caps.
Value and Contra Funds Together:
Previously, a fund house (AMC) could offer either a Value Fund or a Contra Fund, but not both. Under the new rules, AMCs can offer both categories, provided the portfolio overlap between the two schemes is not more than 50%.
2. New Rules on Portfolio Overlap
To prevent different schemes from looking the same (a practice often called "closet indexing"), SEBI has introduced stricter overlap norms.
- The Rule: For Sectoral and Thematic equity categories, no more than 50% of the portfolio can overlap with other equity schemes (except Large Cap funds).
- Calculation: This overlap will be calculated on a quarterly basis using daily portfolio values.
- Timeline: Existing schemes have 3 years to comply with this rule. If they fail to meet the criteria after 3 years, they must be merged with other schemes.
- Transparency: Fund houses must now disclose portfolio overlap levels on their websites monthly.
3. Introduction of "Life Cycle Funds"
SEBI has introduced a brand new category called Life Cycle Funds.
- These are open-ended schemes with a "target maturity" date. They follow a glide path strategy, meaning the fund starts with higher equity exposure and gradually shifts towards safer assets (like debt) as the maturity date approaches.
- These funds can have tenures ranging from 5 to 30 years.
- An AMC can launch a maximum of six such funds.
- To encourage long-term holding, these funds carry graded exit loads:
- 3% if redeemed within 1 year.
- 2% if redeemed within 2 years.
- 1% if redeemed within 3 years.
4. Discontinuation of "Solution-Oriented" Schemes
The regulator has decided to remove the Solution-Oriented category, which previously included Retirement Funds and Children’s Funds.
- Immediate Effect: Existing schemes in this category must stop accepting fresh subscriptions immediately.
- The Future: These schemes will be merged with other schemes that have a similar asset allocation and risk profile, subject to SEBI approval.
5. Other Important Changes
- Naming Norms: Schemes must have uniform names that align strictly with their category. SEBI has barred the use of names that emphasise only return potential to ensure investors are not misled.
- Gold & Silver in Equity Funds: Equity funds can now hold small portions of Gold, Silver, REITs, and InvITs to better manage liquidity.
- Foreign Securities: These will no longer be treated as a separate asset class.
Conclusion
The new SEBI circular aims to make the mutual fund industry more transparent and easier for investors to understand. By raising the minimum equity requirement to 80% for several categories and enforcing strict overlap rules, the regulator ensures that investors get exactly what they sign up for. Additionally, the introduction of Life Cycle Funds offers a new structured way for long-term financial planning.
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