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Informist, Thursday, Feb. 26, 2026

 

NEW DELHI – The Securities and Exchange Board of India Thursday overhauled the categorisation of mutual fund schemes by recategorising some of the schemes that can be offered to investors. The regulator also approved a new sectoral debt fund offering in five sectors.

 

Sectoral debt funds must invest a minimum 80% of their portfolio in AA+ and above rated debt or debt-related instruments issued by companies in a sector. The five sectors initially allowed are financial services, energy, infrastructure, housing, and real estate, SEBI said in a circular. The duration of the bonds may vary. The scheme should only be offered after ensuring sufficient investment-grade paper in the target sector, SEBI said. 

 

Thursday's circular modifies clause 2.6 of the Master Circular for Mutual Funds issued in June 2024.

The regulator discontinued the "solution-oriented" funds category that targeted minors and those heading into retirement. Instead, SEBI introduced life cycle funds – an open-ended fund with attributes of pre-determined maturity and glide path for goal-based investing.

 

SEBI asked fund houses to stop subscriptions to solution-oriented funds and merge them into existing schemes with similar asset allocation. The regulator retained fund-of-fund schemes and passive funds, including exchange-traded funds, under the "other funds" classification.

 

Medium-term funds and medium-to-long-term debt funds cannot reduce their portfolios' Macaulay durations to less than three and four years, respectively, the circular said. The Macaulay duration is the weighted average term to maturity of the cash flow from a bond, or the point at which the bond's value will equal its purchase price. However, fund managers can still reduce the portfolio duration of such schemes to as low as one year if they have a view on adverse interest rate movements, which they must disclose to investors.

 

As for equity funds, the regulator split value and contra equity funds into two separate categories. Fund houses can offer one of each, provided the portfolio overlap in schemes is not over 50%, the new norms said. Sectoral and thematic equity funds have also been split into separate categories. 

 

"For any scheme offering in the sectoral/thematic equity category, mutual funds shall ensure that no more than 50% of the schemes portfolios would overlap with other equity schemes in the sectoral/thematic category and other equity schemes categories except for the large cap scheme," SEBI said in a circular. Fund houses must now declare category-wise portfolio overlap levels in monthly disclosures.

 

These schemes must comply with the new norms within three years, the regulator said. 35% of the excess overlap must be curtailed by the end of the first year, followed by another 35% in the second year and the remainder by the end of year three. Sectoral and thematic funds can only be launched as per the list published by the Association of Mutual Funds in India, in consultation with SEBI.

 

"Portfolio overlap is also a masterstroke, though operationally intense. Now the portfolio needs to be more aligned towards the end product category rather than being a general, well-diversified portfolio," said Nitin Agrawal, chief executive officer, mutual funds, InCred Money. "Sector debt funds may help deepen the overall debt market by directing flows to growth sectors".

 

The biggest change for hybrid funds was to arbitrage funds. While the core investment strategy remains the same – a minimum 65% of the portfolio in equity or equity-related instruments – the scheme information document for these must publish a defensive consideration. These funds can now take debt exposure only through government securities with less than one year maturity and repo of government bonds. The regulator said balanced hybrid funds must state in their investor descriptions that no arbitrage is permitted in these schemes. 

 

The newly introduced life-cycle fund must follow a glide-path strategy, investing across various asset classes, including equity, debt, infrastructure investment trusts, exchange-traded currency derivatives, and gold and silver exchange-traded funds. It will have predetermined maturity attributes for goal-based investing, the circular said. SEBI also deleted a clause in the 2024 master circular that required mutual fund trustees to certify that new fund offerings were new products and not minor modifications of existing schemes or products.  End

 

Reported by Aaryan Khanna

Edited by Saji George Titus

 

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