SEBI Proposes Revision of Mutual Fund Scheme Categorisation: Key Updates & Investor Impact

Picture your investment portfolio and how you choose schemes – maybe a large-cap fund here, a hybrid one there. Now imagine trying to sift through dozens of near-identical schemes with overlapping portfolios. That confusion is exactly what the Securities and Exchange Board of India (SEBI) is targeting with its latest proposal. Designed to sharpen clarity and enhance choice, these changes could make it much easier for you to understand exactly what you’re investing in and why.

What SEBI wants to change – A clear breakdown

At the heart of SEBI’s July 18, 2025, draft consultation paper are three intertwined goals: simplify, diversify, and protect. Here’s what’s on the table:

• Tighten overlaps between schemes

Overlap means two schemes holding very similar assets, which dilutes differentiation. SEBI wants overlap limits of 50% for value versus contra funds, as well as sectoral/thematic equity schemes (excluding large caps) and 60% for sectoral debt funds.

• Expand permissible secondary assets

Traditionally, equity schemes stuck to equities and debt ones to bonds. SEBI proposes letting equity funds invest residual portions in gold, silver, REITs, InvITs, and debt instruments. Debt funds could also access REITs/InvITs, with some duration-based exceptions.

• Refine naming conventions

To ensure clearer labels, “duration” could be renamed “term,” and “Low Duration Fund” might become “Ultra Short to Short Term Fund.” Scheme names may also include tenure—e.g., “Medium Term Fund (3–4 years)”—while the word “fund” gets replaced with “scheme” for consistency.

• Allow innovation in categories

Managers could offer both value and contra equity funds (subject to overlap cap). Hybrid funds see tighter rules for arbitrage and equity-savings formats. Sectoral debt funds are proposed to launch with similar overlap safeguards. Even solution‑oriented “target‑date” fund‑of‑funds with goal‑based lock‑ins (housing, marriage, retirement) may be added.

• Permit a second scheme in the same category

AMCs with flagship schemes older than 5 years and AUM above ₹50,000 cr can launch a second scheme in the same category. The original stops new inflows, and the newcomer keeps costs in check via similar expense ratios and naming conventions like “Series I” and “Series II.”

These moves aim to reduce clutter while giving you extra choices, especially when existing schemes strain under huge AUMs.

Why this is important for you as an investor

• More uniqueness, less confusion

No more dozens of copycat schemes. With overlap caps, each fund must stand apart, so you’re not unknowingly duplicating holdings.

• Better flexibility and protection

The ability to hold alternative assets – like gold or real estate exposure within equity or debt funds – means smoother volatility management and more dynamic portfolio construction.

• Clearer scheme labels

You’ll know at a glance if you’re picking an ultra‑short term, medium term, or long‑term fund, and what duration it covers.

• Smarter diversification via solution-oriented funds

New goal-based schemes allow you to invest with structure – retirement, marriage, or education with built-in timelines.

• Improved liquidity and scalability

Second-scheme options give large funds breathing space and ensure your investments aren’t jammed by excessive AUM.

What’s on SEBI’s consultation radar now

SEBI is inviting public comments through August 8, 2025. Whether you’re a retail investor, advisor, or asset manager, this is your chance to influence final guidelines. Key questions include:

1. Are 50% overlap caps sufficient?
2. Should hybrid and arbitrage schemes have tighter exposure rules?
3. Does the idea of dual schemes per category help liquidity without harming investors?

Changes will be finalised after feedback, which is likely before late 2025.

Potential challenges and trade-offs

• Overlap monitoring complexity:

Keeping overlap in check demands robust monitoring infrastructure and compliance processes from AMCs.

• Name changes may cause temporary confusion:

Shifting labels like “Fund” to “Scheme” and renaming durations might require a communication push to avoid investor misunderstanding.

• Second scheme concerns:

Some worry that launching new schemes may divert attention from older ones – even if inflows are blocked. Regulators will need to monitor performance and investor impact.

Conclusion

You invest not just with money but with purpose. SEBI’s proposed overhaul is a strategic effort to align mutual fund products with your needs: distinguishing schemes genuinely, diversifying exposure intelligently, and keeping choices clear and scalable. If implemented wisely, these changes may empower you to build sleeker, smarter portfolios, whether you’re a seasoned investor or just starting out.

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