SEBI Overhauls Mutual Fund Categories, Ends Solution-Oriented Plans

In a major development which will have ramification for Asset Management Companies, SEBI has done away with the old mutual fund scheme categorisation framework and replaced it with a multi‑asset framework that recognises InvITs, commodities and target‑date “Life Cycle” products, while doing away with the Solution Oriented category.

This supersede previous categorisation norms, and forces mutual fund managers to rebadge, realign and in some cases merge schemes without treating it as a fundamental attribute change.

Under the new structure, schemes are grouped into five categories – Equity, Debt, Hybrid, Life Cycle Funds and Other Schemes covering Fund of Funds and passive products such as index funds and ETFs. Equity and debt retain familiar categories like large cap, flexi cap, liquid and corporate bond funds, but SEBI has clarified that the residual portion of equity schemes, and of most debt and hybrid schemes, can be parked in money market instruments, gold and silver instruments or InvITs, subject to existing regulatory limits.

Two big additions are Life Cycle Funds and sector‑specific debt funds. Life Cycle Funds are open‑ended, target‑maturity schemes with tenures of five to 30 years that follow a preset glide path, gradually reducing equity and increasing debt and other assets such as gold and silver ETFs as they approach maturity. Sectoral Debt Funds, restricted to AA and above corporate bonds, can focus on sectors such as financial services, energy, infrastructure, housing and real estate and are exempt from standard sector exposure caps.

To curb duplication, the Securities and Exchange Board of India has capped portfolio overlap between Value and Contra funds at 50% and between sectoral or thematic equity schemes and other equity schemes, except large cap at 50%, calculated on ISIN‑level holdings averaged quarterly.

Existing sectoral and thematic schemes have three years to comply, following a prescribed glide path, failing which they must be merged with other schemes.

A major development is the discontinuation of the Solution Oriented category. Existing retirement and children’s plans in this bucket must stop fresh subscriptions immediately and be merged with schemes having similar asset allocation and risk profiles after SEBI’s approval. Foreign securities will no longer be treated as a separate asset class for categorisation purposes.

SEBI has also tightened labelling by stating that scheme names must mirror their category names, and words that highlight only the return aspect are barred from titles, while the “type of scheme” line in offer documents and advertisements must follow standard descriptions.

Fund of Funds with multiple underlying assets must be slotted into standardised equity, debt, hybrid, commodity, overseas and domestic‑plus‑overseas sub‑categories, in line with an earlier norm that also caps how many FoFs can be launched in each bucket.

All existing schemes must match with the new categorisation within six months. Also, mutual funds must publish monthly category‑wise portfolio overlap data on their websites for equity, debt and hybrid schemes, using a standard formula based on the minimum weights of common securities.