SEBI introduces new Mutual Fund Categorization and Rationalisation Schemes:

SEBI introduces new Mutual Fund Categorization and Rationalisation Schemes The Securities and Exchange Board of India (SEBI) has issued its circular on "Categorization and Rationalisation of Mutual Fund Schemes" to bring more clarity, transparency, and uniformity across the mutual fund schemes. SEBI had earlier issued directions about the categorization and rationalization of mutual fund schemes in two circulars. These were combined as clause 2.6 of chapter 2 of the Master Circular for Mutual Funds.

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Now SEBI has issued this new circular HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026 dated February 26, 2026, to replace clause 2.6 of Chapter 2 of the 'Master Circular for Mutual Funds.' Through this circular, SEBI has fixed issues like the portfolio overlap across funds. Other key changes include the discontinuance of solution-oriented schemes, including retirement and children's plans. Also, the thematic funds will now face tighter scrutiny. New Categorisation of Schemes The SEBI has classified the schemes into five categories:

• Equity Scheme: An investment where the money is invested predominantly in equity and equity-related instruments.

• Debt Scheme: It is a mutual fund scheme where the investment is made in a mix of asset classes, such as equity, debt, InvITs and commodity-related instruments as allowed by SEBI.

• Life Cycle Funds: A new category called Life Cycle Funds is being introduced, which will be an open-ended scheme with a predetermined maturity. It will follow a glide path strategy based on investing across various asset classes, i.e., equity, debt, InvITs, ETCDs, and gold & silver ETFs.

• Other Schemes: These include index funds and ETFs (passive schemes) and fund-of-fund schemes.

Changes in Value and Contra Funds The SEBI has allowed the mutual funds to provide both value and contra funds. However, it introduced a strict condition that the scheme portfolio overlap between the two schemes must not exceed the 50% limit. Portfolio Overlap Limits As per the circular, sectoral and thematic funds cannot have more than 50% overlap with other schemes in the sectoral or thematic category, along with other equity schemes (except large-cap schemes). The overlap will be calculated quarterly through the daily portfolio overlap values or the average of the daily portfolio overlap values over a quarter.

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The existing sectoral/thematic schemes get 3 years to comply with the portfolio overlap limit. If the schemes fail to follow the overlap conditions after 3 years, they will be mandatorily merged with other schemes. Uniform Scheme Names To bring more clarity among the investors, SEBI has mandated the uniform naming of schemes. As per the circular, the scheme name must be the same as its category. Additionally, the name of the scheme should not include words or sentences that mention only the return part of the scheme. The SEBI also directed that the 'type of scheme,' which is mentioned below the scheme name, should be as per the description given in the third column of the tables. Discontinuation of Oriented Schemes The SEBI is discontinuing the solutions-oriented scheme category. The current solution-oriented schemes are directed to stop new subscriptions. They will be merged with similar schemes after SEBI approval. The circular is applicable with immediate effect.