SEBI Revises Mutual Fund Scheme Categorisation Norms, Introduces Life Cycle Funds

Today, the Securities and Exchange Board of India (SEBI) revised the regulatory framework for the rationalisation and categorisation of mutual fund schemes. The circular supersedes Clause 2.6 of the Master Circular for Mutual Funds dated 27 June 2024.

A key change is the introduction of Life Cycle Funds as a distinct scheme category. These are open-ended, goal-based funds with a pre-determined maturity, following a glide path investment strategy across equity, debt, InvITs, ETCDs, and gold and silver ETFs. SEBI has prescribed a minimum tenure of five years and a maximum tenure of 30 years, and mandated that the maturity year be disclosed in the scheme name.

SEBI has also relaxed the earlier restriction that required mutual funds to offer either a Value Fund or a Contra Fund. Mutual funds can now offer both, subject to limits on portfolio overlap, which refers to the extent two schemes hold identical securities.

It has introduced portfolio overlap norms for sectoral and thematic schemes. Mutual funds must ensure that no more than 50% of a scheme's portfolio overlaps with other equity schemes, whether in the sectoral, thematic, or other equity categories, except for large-cap schemes.

Additionally, SEBI has discontinued Solution Oriented Schemes, stopping fresh subscriptions immediately. Existing schemes under this category must be merged with similar schemes, subject to SEBI approval.

Lastly, the revised framework also introduces Sectoral Debt Funds in financial services, energy infrastructure, housing, and real estate, subject to minimum investment thresholds.